Advertisement
Canada markets closed
  • S&P/TSX

    21,848.59
    +293.73 (+1.36%)
     
  • S&P 500

    5,447.87
    -16.75 (-0.31%)
     
  • DOW

    39,411.21
    +260.88 (+0.67%)
     
  • CAD/USD

    0.7323
    -0.0000 (-0.00%)
     
  • CRUDE OIL

    81.72
    +0.09 (+0.11%)
     
  • Bitcoin CAD

    82,329.91
    -3,887.05 (-4.51%)
     
  • CMC Crypto 200

    1,255.63
    -54.09 (-4.13%)
     
  • GOLD FUTURES

    2,343.00
    -1.40 (-0.06%)
     
  • RUSSELL 2000

    2,030.81
    +8.78 (+0.43%)
     
  • 10-Yr Bond

    4.2480
    -0.0090 (-0.21%)
     
  • NASDAQ futures

    19,771.75
    +21.00 (+0.11%)
     
  • VOLATILITY

    13.33
    +0.13 (+0.98%)
     
  • FTSE

    8,281.55
    +43.83 (+0.53%)
     
  • NIKKEI 225

    38,804.65
    0.00 (0.00%)
     
  • CAD/EUR

    0.6820
    +0.0002 (+0.03%)
     

Are Investors Undervaluing Shoe Carnival, Inc. (NASDAQ:SCVL) By 38%?

Key Insights

  • Shoe Carnival's estimated fair value is US$39.00 based on 2 Stage Free Cash Flow to Equity

  • Shoe Carnival is estimated to be 38% undervalued based on current share price of US$24.29

  • Shoe Carnival's peers are currently trading at a premium of 145% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Shoe Carnival, Inc. (NASDAQ:SCVL) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

ADVERTISEMENT

See our latest analysis for Shoe Carnival

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$58.9m

US$56.0m

US$65.3m

US$69.2m

US$72.6m

US$75.6m

US$78.2m

US$80.7m

US$83.0m

US$85.2m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ 6.01%

Est @ 4.88%

Est @ 4.08%

Est @ 3.52%

Est @ 3.13%

Est @ 2.86%

Est @ 2.67%

Present Value ($, Millions) Discounted @ 8.5%

US$54.3

US$47.5

US$51.1

US$49.9

US$48.2

US$46.2

US$44.1

US$41.9

US$39.7

US$37.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$460m

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 a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$85m× (1 + 2.2%) ÷ (8.5%– 2.2%) = US$1.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.4b÷ ( 1 + 8.5%)10= US$607m

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$1.1b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$24.3, the company appears quite good value at a 38% 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.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Shoe Carnival 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 8.5%, which is based on a levered beta of 1.265. 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 Shoe Carnival

Strength

  • Currently debt free.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

  • Good value based on P/E ratio and estimated fair value.

Threat

  • No apparent threats visible for SCVL.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Shoe Carnival, there are three further elements you should consider:

  1. Financial Health: Does SCVL 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 SCVL'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.

Have 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. Simply Wall St has no position in any stocks mentioned.