Stock Analysis

Calculating The Intrinsic Value Of John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS)

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NasdaqGS:JBSS
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In this article we are going to estimate the intrinsic value of John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for John B. Sanfilippo & Son

The model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF ($, Millions) US$54.4m US$45.2m US$40.3m US$37.4m US$35.8m US$35.0m US$34.6m US$34.5m US$34.7m US$35.0m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ -10.93% Est @ -7.04% Est @ -4.31% Est @ -2.41% Est @ -1.07% Est @ -0.14% Est @ 0.51% Est @ 0.97%
Present Value ($, Millions) Discounted @ 6.2% US$51.2 US$40.1 US$33.6 US$29.4 US$26.5 US$24.3 US$22.7 US$21.3 US$20.2 US$19.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$288m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.2%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$35m× (1 + 2.0%) ÷ (6.2%– 2.0%) = US$855m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$855m÷ ( 1 + 6.2%)10= US$467m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$755m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$77.0, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGS:JBSS Discounted Cash Flow December 14th 2020

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at John B. Sanfilippo & Son as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.2%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For John B. Sanfilippo & Son, we've compiled three important items you should look at:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with John B. Sanfilippo & Son (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
  2. Future Earnings: How does JBSS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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