Are Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) Investors Paying Above The Intrinsic Value?

Key Insights

• The projected fair value for Sportsman's Warehouse Holdings is US$5.00 based on 2 Stage Free Cash Flow to Equity
• Sportsman's Warehouse Holdings is estimated to be 22% overvalued based on current share price of US$6.09
• The US$9.38 analyst price target for SPWH is 88% more than our estimate of fair value

Does the July share price for Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Sportsman's Warehouse Holdings

The Calculation

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, 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	-US$6.17m	US$5.50m	US$9.71m	US$15.0m	US$20.8m	US$26.5m	US$31.8m	US$36.5m	US$40.4m	US$43.7m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 76.60%	Est @ 54.25%	Est @ 38.61%	Est @ 27.66%	Est @ 20.00%	Est @ 14.63%	Est @ 10.87%	Est @ 8.24%
Present Value ($, Millions) Discounted @ 14%	-US$5.4	US$4.2	US$6.6	US$8.9	US$10.8	US$12.1	US$12.7	US$12.8	US$12.4	US$11.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$87m

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$44m× (1 + 2.1%) ÷ (14%– 2.1%) = US$376m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$376m÷ ( 1 + 14%)¹⁰= US$102m

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$188m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$6.1, the company appears slightly overvalued at the time of writing. 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Sportsman's Warehouse Holdings 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 14%, which is based on a levered beta of 2.000. 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 Sportsman's Warehouse Holdings

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. Why is the intrinsic value lower than the current share price? For Sportsman's Warehouse Holdings, there are three important elements you should further research:

1. Risks: For example, we've discovered 2 warning signs for Sportsman's Warehouse Holdings (1 is a bit concerning!) that you should be aware of before investing here.
2. Future Earnings: How does SPWH'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.

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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.