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- NYSEAM:RLGT
Estimating The Intrinsic Value Of Radiant Logistics Inc (NYSEMKT:RLGT)
Step by step through the calculation
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 start off with we need to estimate the next five years of cash flows. Seeing as no analyst estimates of free cash flow are available I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years. The sum of these cash flows is then discounted to today's value.
5-year cash flow estimate
2017 | 2018 | 2019 | 2020 | 2021 | |
Levered FCF ($, Millions) | $10.55 | $12.55 | $14.81 | $17.33 | $20.10 |
Source | Extrapolated @ (20%, capped from 24.86%) | Extrapolated @ (19%, capped from 24.86%) | Extrapolated @ (18%, capped from 24.86%) | Extrapolated @ (17%, capped from 24.86%) | Extrapolated @ (16%, capped from 24.86%) |
Present Value Discounted @ 10.82% | $9.52 | $10.22 | $10.88 | $11.49 | $12.02 |
Present Value of 5-year Cash Flow (PVCF)= $54
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 an annual growth rate equal to the 10-year government bond rate of 2.5%. We discount this to today's value at a cost of equity of 10.8%.
Terminal Value (TV) = FCF2021 × (1 + g) ÷ (r – g) = $20 × (1 + 2.5%) ÷ (10.8% – 2.5%) = $247
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = $247 / ( 1 + 10.8%)5 = $147
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $202. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $4.11, which, compared to the current share price of $4.64, we find that Radiant Logistics is fair value, maybe slightly overvalued and not available at a discount at this time.
The assumptions
I'd like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Radiant Logistics as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 10.8%, which is based on a levered beta of 1.109. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For RLGT, I've put together three relevant aspects you should further research:
1. Financial Health: Does RLGT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does RLGT'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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of RLGT? 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 for every stock on the AMEX every 6 hours. If you want to find the calculation for other stocks just search here.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.
About NYSEAM:RLGT
Radiant Logistics
Operates as a third-party logistics company, provides technology-enabled global transportation and value-added logistics solutions primarily in the United States and Canada.
Flawless balance sheet with reasonable growth potential.