In this hotel loanarticle I am going to calculate the intrinsic value of Primoris Services Corporation (

NASDAQ:PRIM

) by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 Primoris Services by following the link below.

Check out our latest analysis for Primoris Services

Is PRIM 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. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$70.00

$70.00

$73.27

$76.69

$80.27

Source

Analyst x1

Analyst x1

Est @ 4.67%

Est @ 4.67%

Est @ 4.67%

Present Value Discounted @ 11.98%

$62.51

$55.82

$52.17

$48.76

$45.58

Present Value of 5-year Cash Flow (PVCF)

= US$265m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. 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%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = US$80m × (1 + 2.9%) ÷ (12% – 2.9%) = US$915m

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= US$915m ÷ ( 1 + 12%)

5

= US$519m

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$784m. 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 $15.31

. Compared to the current share price of $18.79, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

Story continues

NasdaqGS:PRIM Intrinsic Value Export January 2nd 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 Primoris Services 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%, which is based on a levered beta of 1.282. 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. What is the reason for the share price to differ from the intrinsic value? For PRIM, I’ve put together three essential aspects you should further research:

Financial Health

: Does PRIM 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 PRIM’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 PRIM? 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 NASDAQ every 6 hours. If you want to find the calculation for other stocks 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

[email protected]

.

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