Advertisement
New Zealand markets close in 5 hours 34 minutes
  • NZX 50

    11,701.72
    -33.99 (-0.29%)
     
  • NZD/USD

    0.6110
    +0.0002 (+0.03%)
     
  • ALL ORDS

    8,132.10
    +49.80 (+0.62%)
     
  • OIL

    79.65
    -0.15 (-0.19%)
     
  • GOLD

    2,432.10
    -6.40 (-0.26%)
     

Is There An Opportunity With 1-800-FLOWERS.COM, Inc.'s (NASDAQ:FLWS) 32% Undervaluation?

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, 1-800-FLOWERS.COM fair value estimate is US$13.54

  • Current share price of US$9.17 suggests 1-800-FLOWERS.COM is potentially 32% undervalued

  • Our fair value estimate is 9.4% higher than 1-800-FLOWERS.COM's analyst price target of US$12.38

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 1-800-FLOWERS.COM

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$62.1m

US$55.6m

US$66.2m

US$62.8m

US$61.0m

US$60.1m

US$60.0m

US$60.3m

US$60.9m

US$61.8m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x1

Est @ -5.15%

Est @ -2.92%

Est @ -1.35%

Est @ -0.26%

Est @ 0.50%

Est @ 1.04%

Est @ 1.42%

Present Value ($, Millions) Discounted @ 8.3%

US$57.3

US$47.4

US$52.1

US$45.6

US$40.9

US$37.2

US$34.2

US$31.8

US$29.6

US$27.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$404m

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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$62m× (1 + 2.3%) ÷ (8.3%– 2.3%) = US$1.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.0b÷ ( 1 + 8.3%)10= US$469m

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$873m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$9.2, the company appears quite undervalued at a 32% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 1-800-FLOWERS.COM 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 8.3%, which is based on a levered beta of 1.314. 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 1-800-FLOWERS.COM

Strength

  • Debt is well covered by cash flow.

Weakness

  • Interest payments on debt are not well covered.

Opportunity

  • Expected to breakeven next year.

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

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

Threat

  • No apparent threats visible for FLWS.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. What is the reason for the share price sitting below the intrinsic value? For 1-800-FLOWERS.COM, there are three essential elements you should further examine:

  1. Financial Health: Does FLWS 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 FLWS'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.