Digi International Inc. (NASDAQ:DGII) intrinsic value could exceed share price by 27%

How far is Digi International Inc. (NASDAQ:DGII) from its intrinsic value? By using our latest financial data to project future cash flows and discounting them to today’s value, Find out if the stock price is fair. The discounted cash flow (DCF) model is used for analysis. Before you think you don’t understand, read on! It’s actually a lot less complicated than you might imagine.

It is worth pointing out that the DCF is not perfect for all situations, as companies may be assessed in different ways. If you want to learn a little more about intrinsic value, you might want to read the Simply Wall St analytical model.

See the latest analysis from Digi International

Is Digi International evaluated fairly?

We use a two stage growth model. This simply means taking into account his two phases of the company’s growth. In the early stage, the company may have a high growth rate, and it is usually assumed that there is a steady growth rate in the second stage. The first step is to estimate the cash flow to the business over the next 10 years. We use analyst estimates when available, but if these are not available, we extrapolate previous free cash flow (FCF) from previous estimates or reported values. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.

DCF is based on the idea that a dollar in the future is worth less than a dollar today, so the sum of these future cash flows is discounted to today’s value.

10-Year Free Cash Flow (FCF) Estimate

(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = $672 million

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After calculating the present value of the future cash flows for the first 10 years, we need to calculate the terminal value. This takes into account all future cash flows after the first stage. We use the Gordon-Growth formula to calculate the terminal value at a future annual growth rate equal to the 5-year average 2.0% of the 10-year Treasury yield. Discount the final cash flows to today’s value at a cost of equity of 8.6%.

Terminal value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = $127 million × (1 + 2.0%) ÷ (8.6% – 2.0%) = $2 billion

Present Value of Terminal Value (PVTV)= television / (1 + r)^Ten= US$2 billion ÷ ( 1 + 8.6%)^Ten= $867 million

The total value, or equity value, is the sum of the present value of the future cash flows, in this case US$1.5 billion. The final step is to divide the stock value by the number of outstanding shares. Compared to its current stock price of $33.9, the company looks a little undervalued at a 21% discount to its current stock price. Assumptions can have a large impact on valuations in any calculation, so it’s best to consider this a rough estimate and not accurate to the last cent.

Assumption

We point out that the most important inputs to discounted cash flows are the discount rate and, of course, the actual cash flows. If you disagree with these results, do the math yourself and play around with the assumptions. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that Digi International is viewed as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the liability. For this calculation we used 8.6% based on a leverage beta of 1.094. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are derived from industry average betas of globally comparable companies and are capped between 0.8 and 2.0. This is a reasonable range for a stable business.

Digi International’s SWOT analysis

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weakness

chance

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Future plans:

Valuation is just one aspect of the coin when it comes to making investment papers, and just one of the many factors by which a company should be evaluated. The DCF model is not a complete equity valuation tool. Instead, the DCF model’s best use is to test certain assumptions or theories to see if they lead to undervaluing or overvaluing a company. For example, a small adjustment to terminal value growth rate can dramatically change overall results. Why is the stock price below intrinsic value? For Digi International, we’ve summarized three factors that need further consideration.

1. risk: For a good example, we found Two Digi International Warning Signs You should know and one of them is a concern.

2. future earnings: How does DGII’s growth rate compare to its peers and the wider market? Manipulate our free analyst growth forecast charts to dig deeper into analyst consensus numbers for the next few years.

3. Other solid businesses: Low debt, high return on equity and a strong past performance are the cornerstones of a strong business. Explore interactive stock listings with solid business fundamentals to see if there are other companies you haven’t considered!

PS. The Simply Wall St app provides discounted cash flow valuations for all NASDAQGS stocks daily. If you want to find calculations for other stocks, search here.

Do you have feedback on this article? What interests you? contact directly with us. Or send an email to our editorial team (at) Simplywallst.com.

This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …

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