AUS
NZ
UK
CA
USA
IND
Highlights
- LCI Industries' valuation is based on a Discounted Cash Flow (DCF) model for estimating the intrinsic value.
- The two-stage DCF model accounts for different growth phases, projecting cash flows over the next decade.
- Terminal value is calculated using the Gordon Growth formula and discounted back to today’s value.
LCI Industries, which operates in the Consumer sector, manufactures and supplies components for the recreational vehicle (RV) and transportation markets. To estimate the intrinsic value of LCI Industries, a commonly used approach is the Discounted Cash Flow (DCF) model. This method helps in projecting the company's future cash flows and discounting them back to the present day to arrive at an estimated value.
The DCF model we applied follows a two-stage approach, reflecting the different growth stages a company might experience. In the first stage, generally considered a higher-growth phase, LCI Industries (NYSE: LCII) ' free cash flow projections are made over the next ten years. Whenever possible, these projections are based on external estimates. However, in the absence of such data, recent free cash flow trends are extrapolated. For companies with shrinking free cash flow, the shrinkage rate is expected to slow down, while those with growing cash flow are anticipated to experience a deceleration in their growth rate over time.
After the first stage, a terminal value is calculated to account for all cash flows beyond the initial ten-year period. To estimate the terminal value, the Gordon Growth formula is employed, assuming a future annual growth rate in line with the 10-year government bond yield average of 2.5%. The cash flows are then discounted back to today’s value using a discount rate or cost of equity of 8.0%.
The sum of the projected cash flows and the discounted terminal value results in the Total Equity Value, which in this case amounts to approximately US$2.4 billion. To determine the value per share, this total equity value is divided by the number of shares outstanding. At the current share price of US$121, LCI Industries appears slightly overvalued according to this DCF model.
It’s essential to recognize that the DCF model is just one method for valuation and may not be suitable in every scenario. As with any complex financial calculation, the accuracy of the final result depends heavily on the assumptions used throughout the process.
