Intrinsic value of Sierra Wireless Inc. - SW

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$33.84

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$33.84

 
Intrinsic value

$10.89

 
Up/down potential

-68%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of SW stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  1.34
  12.20
  11.48
  10.83
  10.25
  9.72
  9.25
  8.83
  8.44
  8.10
  7.79
  7.51
  7.26
  7.03
  6.83
  6.65
  6.48
  6.33
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.57
  5.52
  5.47
  5.42
  5.38
  5.34
Revenue, $m
  832
  934
  1,041
  1,153
  1,272
  1,395
  1,524
  1,659
  1,799
  1,945
  2,096
  2,254
  2,417
  2,587
  2,764
  2,948
  3,139
  3,337
  3,544
  3,760
  3,985
  4,219
  4,463
  4,718
  4,984
  5,261
  5,552
  5,855
  6,172
  6,504
  6,851
Variable operating expenses, $m
 
  916
  1,019
  1,127
  1,240
  1,359
  1,483
  1,612
  1,746
  1,886
  2,031
  2,161
  2,318
  2,481
  2,651
  2,827
  3,010
  3,201
  3,399
  3,606
  3,821
  4,046
  4,280
  4,524
  4,779
  5,046
  5,324
  5,615
  5,919
  6,237
  6,571
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  803
  916
  1,019
  1,127
  1,240
  1,359
  1,483
  1,612
  1,746
  1,886
  2,031
  2,161
  2,318
  2,481
  2,651
  2,827
  3,010
  3,201
  3,399
  3,606
  3,821
  4,046
  4,280
  4,524
  4,779
  5,046
  5,324
  5,615
  5,919
  6,237
  6,571
Operating income, $m
  29
  17
  22
  26
  31
  36
  42
  47
  53
  59
  65
  92
  99
  106
  113
  121
  129
  137
  145
  154
  163
  173
  183
  193
  204
  216
  228
  240
  253
  267
  281
EBITDA, $m
  64
  53
  60
  66
  73
  80
  87
  95
  103
  111
  120
  129
  138
  148
  158
  169
  179
  191
  203
  215
  228
  241
  255
  270
  285
  301
  317
  335
  353
  372
  392
Interest expense (income), $m
  0
  0
  1
  3
  4
  5
  7
  9
  10
  12
  14
  16
  18
  20
  22
  24
  26
  28
  31
  33
  36
  39
  42
  45
  48
  51
  55
  58
  62
  66
  70
Earnings before tax, $m
  27
  17
  21
  24
  27
  31
  35
  39
  43
  47
  51
  77
  82
  87
  92
  97
  103
  108
  114
  121
  127
  134
  141
  149
  156
  165
  173
  182
  191
  201
  211
Tax expense, $m
  6
  5
  6
  6
  7
  8
  9
  10
  12
  13
  14
  21
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  42
  44
  47
  49
  52
  54
  57
Net income, $m
  21
  13
  15
  17
  20
  23
  25
  28
  31
  34
  38
  56
  60
  63
  67
  71
  75
  79
  84
  88
  93
  98
  103
  109
  114
  120
  126
  133
  140
  147
  154

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  139
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  782
  721
  804
  891
  983
  1,078
  1,178
  1,282
  1,390
  1,503
  1,620
  1,742
  1,868
  1,999
  2,136
  2,278
  2,426
  2,579
  2,739
  2,906
  3,079
  3,260
  3,449
  3,646
  3,851
  4,066
  4,290
  4,525
  4,770
  5,026
  5,295
Adjusted assets (=assets-cash), $m
  643
  721
  804
  891
  983
  1,078
  1,178
  1,282
  1,390
  1,503
  1,620
  1,742
  1,868
  1,999
  2,136
  2,278
  2,426
  2,579
  2,739
  2,906
  3,079
  3,260
  3,449
  3,646
  3,851
  4,066
  4,290
  4,525
  4,770
  5,026
  5,295
Revenue / Adjusted assets
  1.294
  1.295
  1.295
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
  1.294
Average production assets, $m
  131
  147
  163
  181
  200
  219
  239
  260
  282
  305
  329
  354
  379
  406
  434
  463
  493
  524
  556
  590
  626
  662
  701
  741
  782
  826
  872
  919
  969
  1,021
  1,076
Working capital, $m
  164
  28
  31
  35
  38
  42
  46
  50
  54
  58
  63
  68
  73
  78
  83
  88
  94
  100
  106
  113
  120
  127
  134
  142
  150
  158
  167
  176
  185
  195
  206
Total debt, $m
  0
  36
  74
  113
  155
  199
  244
  292
  341
  392
  446
  501
  559
  619
  681
  746
  813
  883
  956
  1,032
  1,111
  1,194
  1,280
  1,369
  1,463
  1,561
  1,663
  1,770
  1,882
  1,999
  2,121
Total liabilities, $m
  293
  329
  367
  406
  448
  492
  537
  585
  634
  685
  739
  794
  852
  912
  974
  1,039
  1,106
  1,176
  1,249
  1,325
  1,404
  1,487
  1,573
  1,662
  1,756
  1,854
  1,956
  2,063
  2,175
  2,292
  2,414
Total equity, $m
  489
  392
  437
  485
  535
  587
  641
  697
  756
  818
  881
  947
  1,016
  1,088
  1,162
  1,239
  1,320
  1,403
  1,490
  1,581
  1,675
  1,774
  1,876
  1,983
  2,095
  2,212
  2,334
  2,461
  2,595
  2,734
  2,880
Total liabilities and equity, $m
  782
  721
  804
  891
  983
  1,079
  1,178
  1,282
  1,390
  1,503
  1,620
  1,741
  1,868
  2,000
  2,136
  2,278
  2,426
  2,579
  2,739
  2,906
  3,079
  3,261
  3,449
  3,645
  3,851
  4,066
  4,290
  4,524
  4,770
  5,026
  5,294
Debt-to-equity ratio
  0.000
  0.090
  0.170
  0.230
  0.290
  0.340
  0.380
  0.420
  0.450
  0.480
  0.510
  0.530
  0.550
  0.570
  0.590
  0.600
  0.620
  0.630
  0.640
  0.650
  0.660
  0.670
  0.680
  0.690
  0.700
  0.710
  0.710
  0.720
  0.730
  0.730
  0.740
Adjusted equity ratio
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544
  0.544

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  21
  13
  15
  17
  20
  23
  25
  28
  31
  34
  38
  56
  60
  63
  67
  71
  75
  79
  84
  88
  93
  98
  103
  109
  114
  120
  126
  133
  140
  147
  154
Depreciation, amort., depletion, $m
  35
  36
  38
  39
  41
  43
  45
  48
  50
  52
  55
  36
  39
  42
  45
  48
  51
  54
  57
  61
  64
  68
  72
  76
  81
  85
  90
  95
  100
  105
  111
Funds from operations, $m
  84
  49
  53
  57
  61
  66
  71
  76
  81
  87
  92
  93
  99
  105
  112
  119
  126
  133
  141
  149
  157
  166
  175
  185
  195
  205
  216
  228
  239
  252
  265
Change in working capital, $m
  20
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
Cash from operations, $m
  64
  62
  49
  54
  58
  62
  67
  72
  77
  82
  88
  88
  94
  100
  106
  113
  120
  127
  135
  142
  151
  159
  168
  177
  187
  197
  207
  218
  230
  242
  254
Maintenance CAPEX, $m
  0
  -13
  -15
  -17
  -19
  -21
  -23
  -25
  -27
  -29
  -31
  -34
  -36
  -39
  -42
  -45
  -48
  -51
  -54
  -57
  -61
  -64
  -68
  -72
  -76
  -81
  -85
  -90
  -95
  -100
  -105
New CAPEX, $m
  -24
  -16
  -17
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -52
  -55
Cash from investing activities, $m
  -36
  -29
  -32
  -35
  -38
  -40
  -43
  -46
  -49
  -52
  -55
  -59
  -62
  -66
  -70
  -74
  -78
  -82
  -86
  -91
  -96
  -101
  -106
  -112
  -118
  -125
  -131
  -138
  -145
  -152
  -160
Free cash flow, $m
  28
  33
  18
  19
  21
  22
  24
  26
  28
  30
  32
  29
  32
  34
  37
  39
  42
  45
  48
  51
  55
  58
  61
  65
  69
  73
  77
  81
  85
  90
  95
Issuance/(repayment) of debt, $m
  0
  36
  38
  40
  42
  44
  45
  47
  49
  51
  53
  55
  58
  60
  62
  65
  67
  70
  73
  76
  79
  82
  86
  90
  94
  98
  102
  107
  112
  117
  122
Issuance/(repurchase) of shares, $m
  -17
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -18
  36
  38
  40
  42
  44
  45
  47
  49
  51
  53
  55
  58
  60
  62
  65
  67
  70
  73
  76
  79
  82
  86
  90
  94
  98
  102
  107
  112
  117
  122
Total cash flow (excl. dividends), $m
  12
  69
  55
  59
  62
  66
  70
  73
  77
  82
  86
  85
  89
  94
  99
  104
  110
  115
  121
  127
  134
  140
  147
  155
  162
  171
  179
  188
  197
  207
  217
Retained Cash Flow (-), $m
  -5
  -42
  -45
  -47
  -50
  -52
  -54
  -57
  -59
  -61
  -64
  -66
  -69
  -71
  -74
  -77
  -80
  -84
  -87
  -91
  -94
  -98
  -103
  -107
  -112
  -117
  -122
  -128
  -133
  -140
  -146
Prev. year cash balance distribution, $m
 
  139
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  165
  10
  11
  13
  14
  15
  17
  19
  20
  22
  18
  20
  23
  25
  27
  29
  32
  34
  37
  39
  42
  45
  48
  51
  54
  57
  60
  64
  67
  71
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  158
  9
  10
  10
  11
  11
  11
  12
  12
  12
  9
  9
  9
  8
  8
  7
  7
  6
  6
  5
  4
  4
  3
  3
  2
  2
  1
  1
  1
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Sierra Wireless, Inc., together with its subsidiaries, engages in building the Internet of Things (IoT) with intelligent wireless solutions in North America, Europe, and the Asia Pacific. It operates in three segments: Original Equipment Manufacturer (OEM) Solutions, Enterprise Solutions, and Cloud and Connectivity Services. The OEM Solutions segment offers cellular embedded modules, software, and tools to integrate wireless connectivity into various products and solutions for OEM customers, including the AirPrime embedded wireless modules product portfolio; and Legato, an open source, Linux-based application framework. This segment provides its products and solutions to a range of industries, including automotive, transportation, enterprise networking, energy, sales and payment, mobile computing, security, industrial monitoring, field services, and healthcare industries. It also offers professional services to OEM customers during their product development and launch process. The Enterprise Solutions segment provides a range of second, third, and fourth generation cellular embedded wireless modules and gateways, as well as security and device management solutions, and professional services to public safety, transportation, field service, energy, industrial, retail, and financial enterprises. The Cloud and Connectivity Services segment provides secure and scalable cloud based platform for IoT applications; connectivity services, which include smart SIM supported by mobile networks; and managed wireless broadband services. Sierra Wireless, Inc. sells its products directly, as well as through various indirect channels, such as OEMs, distributors, value added resellers, and mobile network operators. The company was founded in 1993 and is headquartered in Richmond, Canada.

FINANCIAL RATIOS  of  Sierra Wireless Inc. (SW)

Valuation Ratios
P/E Ratio 50.8
Price to Sales 1.3
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 16.7
Price to Free Cash Flow 26.6
Growth Rates
Sales Growth Rate 1.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 20%
Cap. Spend. - 3 Yr. Gr. Rate 5.9%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 2.8%
Ret/ On Assets - 3 Yr. Avg. -0.4%
Return On Total Capital 4.3%
Ret/ On T. Cap. - 3 Yr. Avg. -0.4%
Return On Equity 4.3%
Return On Equity - 3 Yr. Avg. -0.4%
Asset Turnover 1.1
Profitability Ratios
Gross Margin 35.3%
Gross Margin - 3 Yr. Avg. 33.3%
EBITDA Margin 7.5%
EBITDA Margin - 3 Yr. Avg. 3.9%
Operating Margin 3.5%
Oper. Margin - 3 Yr. Avg. 1.3%
Pre-Tax Margin 3.2%
Pre-Tax Margin - 3 Yr. Avg. -0.1%
Net Profit Margin 2.5%
Net Profit Margin - 3 Yr. Avg. -0.4%
Effective Tax Rate 22.2%
Eff/ Tax Rate - 3 Yr. Avg. -24.5%
Payout Ratio 0%

SW stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the SW stock intrinsic value calculation we used $832 million for the last fiscal year's total revenue generated by Sierra Wireless Inc.. The default revenue input number comes from 2016 income statement of Sierra Wireless Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our SW stock valuation model: a) initial revenue growth rate of 12.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for SW is calculated based on our internal credit rating of Sierra Wireless Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Sierra Wireless Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of SW stock the variable cost ratio is equal to 98.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for SW stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Sierra Wireless Inc..

Corporate tax rate of 27% is the nominal tax rate for Sierra Wireless Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the SW stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for SW are equal to 15.7%.

Life of production assets of 9.7 years is the average useful life of capital assets used in Sierra Wireless Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for SW is equal to 3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $489 million for Sierra Wireless Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 32.313 million for Sierra Wireless Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Sierra Wireless Inc. at the current share price and the inputted number of shares is $1.1 billion.


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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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