Calculating the intrinsic value of Standex International Corporation (NYSE:SXI)

Key findings

• Using the 2-step free cash flow to equity, the fair value estimate of Standex International is $203.
• With a share price of $176, Standex International appears to be trading close to its estimated fair value
• The analyst price target of $189 for SXI is 7.1% below our fair value estimate

How far is Standex International Corporation (NYSE:SXI) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by taking the expected future cash flows and discounting them to today’s value. One way to do this is by applying the Discounted Cash Flow (DCF) model. There’s actually not too much involved in it, even though it may seem quite complex.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Standex International

The method

We will use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to get estimates of the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will slow their growth rate over this period. We do this to account for the fact that growth tends to slow more in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 840 million US dollars

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.2%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 147 million US dollars × (1 + 2.4%) ÷ (7.2% – 2.4%) = 3.1 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 3.1 billion US dollars ÷ (1 + 7.2%)¹⁰= 1.6 billion US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $2.4 billion. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of $176, the company appears roughly fairly valued at a 13% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we are considering Standex International 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 takes debt into account. In this calculation, we have used 7.2% which is based on a leveraged beta of 1.042. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT Analysis for Standex International

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While a company’s valuation is important, it shouldn’t be the only metric you consider when researching a company. DCF models aren’t the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company is growing at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome can look very different. For Standex International, we’ve put together three basic points you should research further:

1. Risks: Consider, for example, the ever-present specter of investment risk. We have identified 2 warning signs with Standex International, and understanding these should be part of your investment process.
2. Future income: How does SXI’s growth rate compare to other companies and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
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 you might be missing out on!

PS. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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