- United States
- /
- Tobacco
- /
- NYSE:TPB
Turning Point Brands, Inc.'s (NYSE:TPB) Intrinsic Value Is Potentially 47% Above Its Share Price
Key Insights
- The projected fair value for Turning Point Brands is US$94.24 based on 2 Stage Free Cash Flow to Equity
- Turning Point Brands is estimated to be 32% undervalued based on current share price of US$64.22
- Our fair value estimate is 45% higher than Turning Point Brands' analyst price target of US$65.00
Today we will run through one way of estimating the intrinsic value of Turning Point Brands, Inc. (NYSE:TPB) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Turning Point Brands
The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$65.1m | US$69.4m | US$69.6m | US$70.4m | US$71.4m | US$72.7m | US$74.3m | US$75.9m | US$77.7m | US$79.6m |
Growth Rate Estimate Source | Analyst x3 | Analyst x2 | Est @ 0.36% | Est @ 1.04% | Est @ 1.51% | Est @ 1.84% | Est @ 2.08% | Est @ 2.24% | Est @ 2.35% | Est @ 2.43% |
Present Value ($, Millions) Discounted @ 6.4% | US$61.2 | US$61.3 | US$57.8 | US$54.8 | US$52.3 | US$50.1 | US$48.0 | US$46.1 | US$44.3 | US$42.7 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$519m
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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 6.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$80m× (1 + 2.6%) ÷ (6.4%– 2.6%) = US$2.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.1b÷ ( 1 + 6.4%)10= US$1.1b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$1.7b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$64.2, the company appears quite undervalued at a 32% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important 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 Turning Point Brands 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 6.4%, which is based on a levered beta of 0.925. 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.
SWOT Analysis for Turning Point Brands
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Dividend is low compared to the top 25% of dividend payers in the Tobacco market.
- Annual earnings are forecast to grow for the next 3 years.
- Trading below our estimate of fair value by more than 20%.
- Annual earnings are forecast to grow slower than the American market.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Turning Point Brands, we've compiled three further items you should further examine:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Turning Point Brands , and understanding it should be part of your investment process.
- Future Earnings: How does TPB'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.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.
Valuation is complex, but we're here to simplify it.
Discover if Turning Point Brands might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:TPB
Turning Point Brands
Manufactures, markets, and distributes branded consumer products.
Solid track record with adequate balance sheet.