A Look At The Intrinsic Value Of Tennant Company (NYSE:TNC)

Saundra Reilly

Sat, Jan 5, 2019, 7:58 AM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Tennant Company (NYSE:TNC) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. I will be using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Tennant by following the link below.

See our latest analysis for Tennant

Is TNC fairly valued?

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF ($, Millions)	$77.30	$85.90	$104.20	$119.30	$135.60
Source	Analyst x1	Analyst x1	Analyst x1	Analyst x1	Analyst x1
Present Value Discounted @ 12.69%	$68.60	$67.65	$72.82	$73.99	$74.63

Present Value of 5-year Cash Flow (PVCF)= US$358m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 12.7%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = US$136m × (1 + 2.9%) ÷ (12.7% – 2.9%) = US$1.4b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = US$1.4b ÷ ( 1 + 12.7%)⁵ = US$789m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.1b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of $63.27. Compared to the current share price of $52.72, the stock is about right, perhaps slightly undervalued at a 17% discount to what it is available for right now.

NYSE:TNC Intrinsic Value Export January 5th 19

Important assumptions

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Tennant 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 12.7%, which is based on a levered beta of 1.381. 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 TNC, there are three relevant aspects you should further examine:

Financial Health: Does TNC 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.
Future Earnings: How does TNC’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TNC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info