Valuation & Recommendation
DCF Valuation –
Our five-year free cash flow to equity model assumes that over the next year, sales will grow at 15%, a slight increase over the previous full-year growth of 14.2%. We use a three-step growth model to reflect the expected pickup in sales growth to 21% in the second year given the expansion efforts. This then gradually slows down to what we consider our long-term terminal growth rate of 7.4%.
Operating Margin is expected to gradually rise over time than fall to the levels of previous historical averages in its terminal year. Net profit margin over the forecasted period is expected to be on average 9.5%.
We adjust cash flow from operations to get to free cash flow, net of capital expenditure needs, and adjust for expansionary capital expenditures. We then adjust for net changes in debt (repayments and any new cash proceeds) to get to our free cash flows. The cost of equity was determined at 13.26% to get our equity value of $12,350,965,428.54 resulting in a share price of $9.89.
P/E Valuation –
Our price to equity valuation utilized our DCF forward year outlook in sales of $6.507 Billion and a net profit margin of 9.4% to arrive at a profit of $611.7 million; and earnings per share of $0.49. The stock is currently trading at 23.76x, a little above the normalized Junior Market average of 22.11x. When we utilize this market average and our forward EPS, we arrive at a valuation of $10.82.
Averaging our P/E and DCF estimates we get a future price of $10.36, a 3.03% upside relative to the March 25, 2022, close price of $10.05, suggesting the stock is trading within its fair value. In consideration of our estimated fair value and the aforementioned discussion regarding the Company’s outlook, we’ve issued a MARKETWEIGHT recommendation.
| Stock | Fontana |
|---|---|
| Close Price | J$10.05 |
| Estimated Fair Value | J$10.36 |
| YTD Return | 29.79% |
| Trailing P/E | 23.76x |
| Forward PE | 20.53% |
| Dividend Yield | 3.18% |
| Potential Upside | 3.03% |
| Total Return | 6.22% |
| Recommendation | MARKETWEIGHT |
March 25, 2022
Full Equity Analysis
