In this article I am going to calculate the intrinsic value of Ichor Holdings Ltd (NASDAQ:ICHR) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in January 2018 so be sure check the latest calculation for Ichor Holdings here.

Is ICHR fairly valued?

I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I took the analyst consensus estimates of ICHR’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 10%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $318.3M. Want to know how I arrived at this number? Check out our detailed analysis here.

Above is a visual representation of how ICHR’s top and bottom lines are expected to move going forward, which should give you an idea of ICHR’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $872.1M.

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 $1,190.3M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $46.52, which, compared to the current share price of $25.6, we see that Ichor Holdings is quite good value at a 44.97% discount to what it is available for right now.

Next Steps:

Whilst important, DCF calculation 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 ICHR, I’ve compiled three important factors you should further examine:

• 1. Financial Health: Does ICHR 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.

• 2. Future Earnings: How does ICHR’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.

• 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ICHR? 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 for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see pass 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.