【can you use whitening strips if you have gum disease】Intrinsic Calculation For Old Dominion Freight Line, Inc. (NASDAQ:ODFL) Shows Investors Are Overpaying

In this can you use whitening strips if you have gum diseasearticle I am going to calculate the intrinsic value of Old Dominion Freight Line, Inc. (

NASDAQ:ODFL

) by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in 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 Old Dominion Freight Line by following the link below.

View our latest analysis for Old Dominion Freight Line

The model

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. 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. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$330.17

$410.90

$468.00

$548.00

$595.16

Source

Analyst x6

Analyst x4

Analyst x1

Analyst x1

Est @ 8.61%

Present Value Discounted @ 9.48%

$301.59

$342.83

$356.66

$381.48

$378.43

Present Value of 5-year Cash Flow (PVCF)

= US$1.8b

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. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 9.5%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = US$595m × (1 + 2.9%) ÷ (9.5% – 2.9%) = US$9.4b

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= US$9.4b ÷ ( 1 + 9.5%)

5

= US$6.0b

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$7.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR.

This results in an intrinsic value of $94.54

. Relative to the current share price of $122.61, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

Story continues

NasdaqGS:ODFL Intrinsic Value Export January 2nd 19

Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Old Dominion Freight Line 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 9.5%, which is based on a levered beta of 0.926. 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 ODFL, there are three fundamental factors you should look at:

Financial Health

: Does ODFL 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 ODFL’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 ODFL? 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

[email protected]

.

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