Stock Analysis

Leslie's, Inc. (NASDAQ:LESL) Shares Could Be 43% Below Their Intrinsic Value Estimate

  •  Updated
NasdaqGS:LESL
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Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Leslie's, Inc. (NASDAQ:LESL) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Leslie's

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. To start off with, we need to estimate the next ten years of cash flows. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$183.8m US$204.6m US$219.9m US$232.6m US$243.5m US$252.8m US$261.0m US$268.5m US$275.5m US$282.1m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 7.46% Est @ 5.81% Est @ 4.65% Est @ 3.84% Est @ 3.27% Est @ 2.87% Est @ 2.59% Est @ 2.39%
Present Value ($, Millions) Discounted @ 7.0% US$172 US$179 US$180 US$178 US$174 US$169 US$163 US$156 US$150 US$144

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.7b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.0%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$282m× (1 + 1.9%) ÷ (7.0%– 1.9%) = US$5.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.7b÷ ( 1 + 7.0%)10= US$2.9b

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$4.6b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$14.1, the company appears quite good value at a 43% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
NasdaqGS:LESL Discounted Cash Flow September 5th 2022

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Leslie's 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 7.0%, which is based on a levered beta of 1.191. 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:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Leslie's, we've compiled three further factors you should consider:

  1. Risks: As an example, we've found 3 warning signs for Leslie's that you need to consider before investing here.
  2. Future Earnings: How does LESL'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Leslie's is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:LESL

Leslie's

Leslie's, Inc. operates as a direct-to-consumer pool and spa care brand in the United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth2
Past Performance3
Financial Health1
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Fair value with acceptable track record.