A Look At The Intrinsic Value Of Universal Logistics Holdings, Inc. (NASDAQ:ULH)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Universal Logistics Holdings fair value estimate is US$28.13
• Universal Logistics Holdings' US$30.75 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -38%, Universal Logistics Holdings' competitors seem to be trading at a greater premium to fair value

How far off is Universal Logistics Holdings, Inc. (NASDAQ:ULH) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Universal Logistics Holdings

Is Universal Logistics Holdings Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$11.2m	US$83.1m	US$70.0m	US$62.7m	US$58.6m	US$56.3m	US$55.1m	US$54.6m	US$54.7m	US$55.1m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -15.78%	Est @ -10.38%	Est @ -6.60%	Est @ -3.95%	Est @ -2.10%	Est @ -0.81%	Est @ 0.10%	Est @ 0.74%
Present Value ($, Millions) Discounted @ 8.7%	US$10.3	US$70.3	US$54.5	US$44.9	US$38.6	US$34.1	US$30.7	US$28.0	US$25.8	US$23.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$361m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$55m× (1 + 2.2%) ÷ (8.7%– 2.2%) = US$870m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$870m÷ ( 1 + 8.7%)¹⁰= US$378m

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$740m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$30.8, the company appears around fair value at the time of writing. 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 Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Universal Logistics 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 8.7%, which is based on a levered beta of 1.295. 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 Universal Logistics Holdings

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 Universal Logistics Holdings, we've put together three fundamental aspects you should consider:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Universal Logistics Holdings .
2. Future Earnings: How does ULH'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 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.

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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.