Titan Machinery Inc.'s (NASDAQ:TITN) Intrinsic Value Is Potentially 36% Above Its Share Price

Simply Wall St.11-01

Key Insights Using the 2 Stage Free Cash Flow to Equity, Titan Machinery fair value estimate is US$18.68 Titan Machinery's US$13.73 share price signals that it might be 27% undervalued Analyst ...

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Titan Machinery's US$13.73 share price signals that it might be 27% undervalued. Analyst price target for TITN is US$16.80 which is 10% below our fair value estimate. How far off is Titan Machinery Inc.  from its intrinsic value?Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow  model. Before you think you won't be able to understand it, just read on!We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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(NASDAQ:TITN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. \n We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. \n View our latest analysis for Titan Machinery \n Crunching The Numbers \n 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. \n Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: \n 10-year free cash flow (FCF) forecast \n\n\n\n\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n2034\n\n\n Levered FCF ($, Millions) \n-US$17.9m\nUS$127.7m\nUS$95.2m\nUS$81.6m\nUS$45.3m\nUS$36.2m\nUS$31.4m\nUS$28.7m\nUS$27.2m\nUS$26.4m\n\n\nGrowth Rate Estimate Source\nAnalyst x1\nAnalyst x1\nAnalyst x1\nAnalyst x1\nAnalyst x1\nEst @ -20.12%\nEst @ -13.33%\nEst @ -8.58%\nEst @ -5.26%\nEst @ -2.93%\n\n\n Present Value ($, Millions) Discounted @ 11% \n-US$16.2\nUS$104\nUS$70.1\nUS$54.3\nUS$27.2\nUS$19.6\nUS$15.4\nUS$12.7\nUS$10.8\nUS$9.5\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$308m\n The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.5%) 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 11%. \nTerminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$26m× (1 + 2.5%) ÷ (11%– 2.5%) = US$328m\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$328m÷ ( 1 + 11%)10= US$118m\n The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$426m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$13.7, the company appears a touch undervalued at a 27% 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. \n\n\n\n  NasdaqGS:TITN Discounted Cash Flow November 1st 2024\n \n\n The Assumptions \n Now 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 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 Titan Machinery 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 11%, 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. \nSWOT Analysis for Titan Machinery\n\n\nStrength\n\nDebt is well covered by earnings.\n\n\nBalance sheet summary for TITN.\n\n\n\nWeakness\n\nEarnings declined over the past year.\n\n\n\nOpportunity\n\nTrading below our estimate of fair value by more than 20%.\n\n\n\nThreat\n\nDebt is not well covered by operating cash flow.\n\n\nAnnual earnings are forecast to decline for the next 3 years.\n\n\nIs TITN well equipped to handle threats?\n\n\n\n Next Steps: \n Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Titan Machinery, there are three relevant items you should explore: \n\n Risks: For example, we've discovered 3 warning signs for Titan Machinery (2 are potentially serious!) that you should be aware of before investing here. \nFuture Earnings: How does TITN'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.\n 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! \n\n 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.\nHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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. 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