Orion Group Holdings, Inc. NYSE:ORN Shares Could Fall 25% Below Their Intrinsic Value Estimate

What is the December share value for Orion Group Holdings, Inc.NYSE:ORNWhat does the stock’s actual value really reflect? We will now estimate the stock’s intrinsic worth by taking future cash flows and reducing them to today’s price. The Discounted Cash Flow model (DCF), will be used in our analysis. As you can see, it is not difficult to follow.

Companies can be valued in many different ways. Therefore, a DCF may not work for everyone. If you are interested in learning more about intrinsic value, please take a look at the Simply Wall St analysis model.

Check out our latest analysis for Orion Group Holdings

What is The Estimated Value of Your Property?

A 2-stage model is what we use. It simply means there are two periods of growth for cash flows. The first stage generally has higher growth while the second stage has lower growth. We need to first estimate the cash flow for the next ten year. If possible, we use analyst estimates. When these aren’t available, we extrapolate the previous cash flow (FCF), based on the last estimate. Assume that companies with declining free cash flows will slow down their rate of shrinkage. Companies with growing free money flow will see a slowing growth rate. This is because growth tends to slow down more in the beginning years than in the later years.

We assume that a dollar is more valuable today than it will be in the future. To arrive at an estimate of the present value, we must subtract the sum of future cash flows.

Estimate of 10-year Free Cash Flow (FCF).

(“Est”) = FCF growth rate calculated by Simply Wall St
Present Value of 10-year Cash flow (PVCF). = US$52m

After calculating future cash flow projections over the initial period of 10 years, the Terminal Value is calculated. This accounts for future cash flows beyond this stage. A conservative growth rate that is not above a country’s GDP growth is used for a variety of reasons. To estimate future growth, we used the 5-year average 10-year government bond yield (2.0%). Similar to the 10-year period of ‘growth,’ we also discount future cash flows to today’s value using a cost-of-equity of 11%.

Terminal Value (TV).= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$11m× (1 + 2.0%) ÷ (11%– 2.0%) = US$126m

Present Value of Terminal Valu (PVTV).= TV / (1+ r)¹⁰= US$126m÷ ( 1 + 11%)¹⁰= US$46m

The equity value (or total value) is the sum of future cash flows and the present value. In this instance, it is US$98m. We divide the equity value by how many shares are outstanding in the last step. The company seems to be slightly undervalued compared to its current share price of US$2.3. This discount is 25% compared to where the stock market trades at the moment. But, this is only an approximate valuation. Like any complicated formula, garbage in, trash out.

Important Assumptions

We believe that the two most important inputs for a discounted cash flow are the actual cash flows and the discount rate. These inputs don’t necessarily have to be agreed upon. I recommend that you redo the calculations and play with them. The DCF doesn’t take into consideration the possibility of a cyclicality in an industry or future capital needs of a company. Therefore, it is not a comprehensive picture of a company’s potential results. Orion Group Holdings is considered potential shareholders. Therefore, we use the cost-of-equity as our discount rate. This is in contrast to the cost capital (or the weighted average capital cost, WACC), which accounts for debt. This calculation uses 11%, which assumes a beta of 1.541. Beta measures a stock’s volatility in relation to the overall market. Our beta is determined from the industry’s average beta of globally comparable businesses. There is an imposed limit between 0.8% and 2.0. This is a reasonable range to consider stable business.

Orion Group Holdings SWOT Analysis

Strength

Weakness

Opportunity

Threat

Moving on

While the DCF calculation is important, it shouldn’t be the only piece of analysis that you examine for a company. With a DCF model, it’s impossible to get a reliable valuation. A DCF model can be used to test assumptions and theories to determine if the company is under- or overvalued. It is possible for the output to look very different if a company grows at an unusual rate or if the cost of equity or risk-free rate rises rapidly. How can we determine why the company trades at a discount relative to its intrinsic value? There are three factors that Orion Group Holdings should consider:

1. Risques: You should be aware that the following are important. 3 warning signs we’ve spotted with Orion Group Holdings .

2. Future EarningsHow does ORN’s growth rate compare with its peers and wider market? Our interactive tool allows you to dig deeper into the analyst consensus numbers for the coming years. free analyst growth expectation chart.

3. You can also look for high-quality alternatives: Are you looking for a versatile player? Explore our interactive list of high quality stocks Get an idea of what else you might be missing

PS. PS. To find out the calculation for other stocks, click here search here.

Give feedback about this article Are you concerned about the content? Get in touch Contact us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article is by Simply Wall St. It is general in nature. Our commentary is based on historical data, analyst forecasts and other unbiased information. We do not intend to provide financial advice. This does not constitute a recommendation for you to buy or sell any stock. It also does not consider your financial situation or objectives. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis might not include the most recent announcements from price-sensitive companies or qualitative material. Simply Wall St holds no position in any of the stocks mentioned.

Participate in a Paid User Research Session
You’ll receive a Amazon Gift Card – US$30 Spend an hour helping us to create better tools for individual investors. Sign up here