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An Intrinsic Calculation For Comfort Systems USA, Inc. (NYSE:FIX) Suggests It's 47% Undervalued

Today we will run through one way of estimating the intrinsic value of Comfort Systems USA, Inc. (NYSE:FIX) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. What's The Estimated Valuation? We're 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 a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 10-year free cash flow (FCF) estimate Levered FCF ($, Millions) US$267.7m US$295.0m US$317.8m US$336.9m US$353.0m US$366.8m US$379.1m US$390.1m US$400.3m US$410.0m Growth Rate Estimate Source Analyst x2 Est @ 10.21% Est @ 7.73% Est @ 5.99% Est @ 4.78% Est @ 3.93% Est @ 3.33% Est @ 2.91% Est @ 2.62% Est @ 2.42% ("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$2.5b After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%. Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$410m× (1 + 1.9%) ÷ (6.5%– 1.9%) = US$9.2b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$9.2b÷ ( 1 + 6.5%)10= US$4.9b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$7.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$108, the company appears quite undervalued at a 47% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. The Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Comfort Systems USA as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.5%, which is based on a levered beta of 1.077. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Moving On: Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Comfort Systems USA, we've compiled three important aspects you should look at: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Comfort Systems USA (at least 1 which is a bit concerning) , and understanding these should be part of your investment process. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for FIX's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. If you want to know who really controls 3M Company (NYSE:MMM), then you'll have to look at the makeup of its share registry. Insiders often own a large chunk of younger, smaller, companies while huge companies tend to have institutions as shareholders. Companies that used to be publicly owned tend to have lower insider ownership. 3M has a market capitalization of US$85b, so it's too big to fly under the radar. We'd expect to see both institutions and retail investors owning a portion of the company. Our analysis of the ownership of the company, below, shows that institutional investors have bought into the company. We can zoom in on the different ownership groups, to learn more about 3M. What Does The Institutional Ownership Tell Us About 3M? Institutions typically measure themselves against a benchmark when reporting to their own investors, so they often become more enthusiastic about a stock once it's included in a major index. We would expect most companies to have some institutions on the register, especially if they are growing. We can see that 3M does have institutional investors; and they hold a good portion of the company's stock. This suggests some credibility amongst professional investors. But we can't rely on that fact alone since institutions make bad investments sometimes, just like everyone does. When multiple institutions own a stock, there's always a risk that they are in a 'crowded trade'. When such a trade goes wrong, multiple parties may compete to sell stock fast. This risk is higher in a company without a history of growth. You can see 3M's historic earnings and revenue below, but keep in mind there's always more to the story. Since institutional investors own more than half the issued stock, the board will likely have to pay attention to their preferences. 3M is not owned by hedge funds. Looking at our data, we can see that the largest shareholder is The Vanguard Group, Inc. with 8.3% of shares outstanding. BlackRock, Inc. is the second largest shareholder owning 7.5% of common stock, and State Street Global Advisors, Inc. holds about 5.7% of the company stock. Our studies suggest that the top 25 shareholders collectively control less than half of the company's shares, meaning that the company's shares are widely disseminated and there is no dominant shareholder. While it makes sense to study institutional ownership data for a company, it also makes sense to study analyst sentiments to know which way the wind is blowing. Quite a few analysts cover the stock, so you could look into forecast growth quite easily. Insider Ownership Of 3M The definition of company insiders can be subjective and does vary between jurisdictions. Our data reflects individual insiders, capturing board members at the very least. The company management answer to the board and the latter should represent the interests of shareholders. Notably, sometimes top-level managers are on the board themselves. I generally consider insider ownership to be a good thing. However, on some occasions it makes it more difficult for other shareholders to hold the board accountable for decisions. Our information suggests that 3M Company insiders own under 1% of the company. It is a very large company, so it would be surprising to see insiders own a large proportion of the company. Though their holding amounts to less than 1%, we can see that board members collectively own US$45m worth of shares (at current prices). Arguably recent buying and selling is just as important to consider. You can click here to see if insiders have been buying or selling. General Public Ownership The general public, who are usually individual investors, hold a 33% stake in 3M. This size of ownership, while considerable, may not be enough to change company policy if the decision is not in sync with other large shareholders. Next Steps: It's always worth thinking about the different groups who own shares in a company. But to understand 3M better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with 3M , and understanding them should be part of your investment process. Ultimately the future is most important. You can access this free report on analyst forecasts for the company. NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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