- United States
A Look At The Intrinsic Value Of Axcelis Technologies, Inc. (NASDAQ:ACLS)
- The projected fair value for Axcelis Technologies is US$152 based on 2 Stage Free Cash Flow to Equity
- Axcelis Technologies' US$129 share price indicates it is trading at similar levels as its fair value estimate
- Our fair value estimate is 4.6% lower than Axcelis Technologies' analyst price target of US$145
In this article we are going to estimate the intrinsic value of Axcelis Technologies, Inc. (NASDAQ:ACLS) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Axcelis Technologies
Crunching The Numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
|Levered FCF ($, Millions)||US$252.0m||US$295.6m||US$333.2m||US$364.9m||US$391.5m||US$413.9m||US$433.0m||US$449.7m||US$464.7m||US$478.4m|
|Growth Rate Estimate Source||Est @ 23.79%||Est @ 17.28%||Est @ 12.71%||Est @ 9.52%||Est @ 7.29%||Est @ 5.72%||Est @ 4.63%||Est @ 3.86%||Est @ 3.32%||Est @ 2.95%|
|Present Value ($, Millions) Discounted @ 9.5%||US$230||US$247||US$254||US$254||US$249||US$240||US$230||US$218||US$206||US$193|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.3b
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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.5%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$478m× (1 + 2.1%) ÷ (9.5%– 2.1%) = US$6.6b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.6b÷ ( 1 + 9.5%)10= US$2.7b
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$5.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$129, the company appears about fair value at a 15% 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.
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 Axcelis Technologies 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 9.5%, which is based on a levered beta of 1.248. 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 Axcelis Technologies
- Earnings growth over the past year exceeded the industry.
- Currently debt free.
- No major weaknesses identified for ACLS.
- Annual revenue is forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the American market.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Axcelis Technologies, there are three relevant elements you should further examine:
- Risks: We feel that you should assess the 1 warning sign for Axcelis Technologies we've flagged before making an investment in the company.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ACLS's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- 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. 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.
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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.
Axcelis Technologies, Inc. designs, manufactures, and services ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe, and Asia Pacific.
Outstanding track record with flawless balance sheet.