Intrinsic value of Sleep Country Canada Holdings Inc. - ZZZ

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$39.32

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$39.32

 
Intrinsic value

$67.75

 
Up/down potential

+72%

 
Rating

str. buy

 
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 ZZZ 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 1.5

 

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, %
  14.91
  13.40
  12.56
  11.80
  11.12
  10.51
  9.96
  9.46
  9.02
  8.62
  8.25
  7.93
  7.64
  7.37
  7.14
  6.92
  6.73
  6.56
  6.40
  6.26
  6.13
  6.02
  5.92
  5.83
  5.74
  5.67
  5.60
  5.54
  5.49
  5.44
  5.40
Revenue, $m
  524
  594
  669
  748
  831
  918
  1,010
  1,105
  1,205
  1,309
  1,417
  1,529
  1,646
  1,767
  1,893
  2,025
  2,161
  2,302
  2,450
  2,603
  2,763
  2,929
  3,103
  3,283
  3,472
  3,669
  3,875
  4,089
  4,314
  4,548
  4,794
Variable operating expenses, $m
 
  381
  426
  473
  523
  576
  631
  688
  748
  811
  876
  919
  989
  1,062
  1,138
  1,216
  1,298
  1,383
  1,472
  1,564
  1,660
  1,760
  1,864
  1,973
  2,086
  2,204
  2,328
  2,457
  2,592
  2,733
  2,880
Fixed operating expenses, $m
 
  119
  122
  125
  128
  131
  135
  138
  141
  145
  148
  152
  156
  160
  164
  168
  172
  177
  181
  185
  190
  195
  200
  205
  210
  215
  220
  226
  232
  237
  243
Total operating expenses, $m
  452
  500
  548
  598
  651
  707
  766
  826
  889
  956
  1,024
  1,071
  1,145
  1,222
  1,302
  1,384
  1,470
  1,560
  1,653
  1,749
  1,850
  1,955
  2,064
  2,178
  2,296
  2,419
  2,548
  2,683
  2,824
  2,970
  3,123
Operating income, $m
  72
  94
  121
  149
  179
  211
  244
  279
  315
  353
  393
  458
  501
  546
  592
  640
  690
  743
  797
  854
  913
  974
  1,039
  1,106
  1,176
  1,250
  1,326
  1,406
  1,490
  1,578
  1,670
EBITDA, $m
  84
  123
  151
  180
  211
  243
  277
  313
  350
  389
  429
  471
  515
  561
  608
  658
  709
  762
  818
  876
  937
  1,000
  1,066
  1,134
  1,206
  1,281
  1,360
  1,442
  1,528
  1,618
  1,712
Interest expense (income), $m
  4
  4
  5
  6
  7
  8
  9
  11
  12
  13
  14
  16
  17
  19
  20
  22
  24
  26
  27
  29
  31
  34
  36
  38
  40
  43
  45
  48
  51
  54
  57
Earnings before tax, $m
  67
  90
  116
  143
  172
  203
  235
  269
  304
  340
  378
  442
  484
  527
  571
  618
  667
  717
  770
  824
  881
  941
  1,003
  1,068
  1,136
  1,207
  1,281
  1,358
  1,439
  1,524
  1,613
Tax expense, $m
  17
  24
  31
  39
  47
  55
  63
  73
  82
  92
  102
  119
  131
  142
  154
  167
  180
  194
  208
  223
  238
  254
  271
  288
  307
  326
  346
  367
  389
  412
  436
Net income, $m
  50
  66
  85
  105
  126
  148
  172
  196
  222
  248
  276
  323
  353
  385
  417
  451
  487
  523
  562
  602
  643
  687
  732
  780
  829
  881
  935
  992
  1,051
  1,113
  1,178

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  24
  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
  461
  496
  558
  624
  693
  766
  842
  922
  1,005
  1,092
  1,182
  1,275
  1,373
  1,474
  1,579
  1,689
  1,802
  1,920
  2,043
  2,171
  2,304
  2,443
  2,588
  2,738
  2,896
  3,060
  3,231
  3,411
  3,598
  3,793
  3,998
Adjusted assets (=assets-cash), $m
  437
  496
  558
  624
  693
  766
  842
  922
  1,005
  1,092
  1,182
  1,275
  1,373
  1,474
  1,579
  1,689
  1,802
  1,920
  2,043
  2,171
  2,304
  2,443
  2,588
  2,738
  2,896
  3,060
  3,231
  3,411
  3,598
  3,793
  3,998
Revenue / Adjusted assets
  1.199
  1.198
  1.199
  1.199
  1.199
  1.198
  1.200
  1.198
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
  1.199
Average production assets, $m
  136
  154
  173
  194
  215
  238
  262
  286
  312
  339
  367
  396
  426
  458
  490
  524
  560
  596
  635
  674
  716
  759
  804
  850
  899
  950
  1,004
  1,059
  1,117
  1,178
  1,242
Working capital, $m
  17
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -16
  -17
  -18
  -20
  -21
  -23
  -25
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -43
  -45
  -48
  -50
  -53
  -56
  -59
  -62
Total debt, $m
  119
  146
  173
  203
  234
  267
  301
  337
  374
  413
  454
  496
  539
  585
  632
  681
  732
  785
  840
  898
  958
  1,020
  1,085
  1,153
  1,223
  1,297
  1,374
  1,454
  1,538
  1,626
  1,718
Total liabilities, $m
  196
  223
  250
  280
  311
  344
  378
  414
  451
  490
  531
  573
  616
  662
  709
  758
  809
  862
  917
  975
  1,035
  1,097
  1,162
  1,230
  1,300
  1,374
  1,451
  1,531
  1,615
  1,703
  1,795
Total equity, $m
  265
  273
  307
  344
  382
  422
  464
  508
  554
  601
  651
  703
  756
  812
  870
  930
  993
  1,058
  1,126
  1,196
  1,270
  1,346
  1,426
  1,509
  1,596
  1,686
  1,781
  1,879
  1,982
  2,090
  2,203
Total liabilities and equity, $m
  461
  496
  557
  624
  693
  766
  842
  922
  1,005
  1,091
  1,182
  1,276
  1,372
  1,474
  1,579
  1,688
  1,802
  1,920
  2,043
  2,171
  2,305
  2,443
  2,588
  2,739
  2,896
  3,060
  3,232
  3,410
  3,597
  3,793
  3,998
Debt-to-equity ratio
  0.449
  0.530
  0.560
  0.590
  0.610
  0.630
  0.650
  0.660
  0.680
  0.690
  0.700
  0.710
  0.710
  0.720
  0.730
  0.730
  0.740
  0.740
  0.750
  0.750
  0.750
  0.760
  0.760
  0.760
  0.770
  0.770
  0.770
  0.770
  0.780
  0.780
  0.780
Adjusted equity ratio
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551
  0.551

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  50
  66
  85
  105
  126
  148
  172
  196
  222
  248
  276
  323
  353
  385
  417
  451
  487
  523
  562
  602
  643
  687
  732
  780
  829
  881
  935
  992
  1,051
  1,113
  1,178
Depreciation, amort., depletion, $m
  12
  29
  30
  31
  31
  32
  33
  34
  35
  35
  36
  13
  14
  15
  16
  17
  19
  20
  21
  22
  24
  25
  27
  28
  30
  32
  33
  35
  37
  39
  41
Funds from operations, $m
  41
  95
  115
  135
  157
  180
  204
  230
  256
  284
  313
  336
  367
  400
  434
  469
  505
  543
  583
  624
  667
  712
  759
  808
  859
  913
  968
  1,027
  1,088
  1,152
  1,219
Change in working capital, $m
  -13
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
Cash from operations, $m
  54
  98
  115
  136
  158
  181
  206
  231
  258
  285
  314
  338
  369
  401
  435
  470
  507
  545
  585
  626
  669
  714
  761
  810
  862
  915
  971
  1,030
  1,091
  1,155
  1,222
Maintenance CAPEX, $m
  0
  -5
  -5
  -6
  -6
  -7
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -19
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -39
New CAPEX, $m
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -47
  -49
  -51
  -53
  -56
  -58
  -61
  -64
Cash from investing activities, $m
  -17
  -23
  -24
  -26
  -28
  -30
  -32
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -48
  -50
  -52
  -56
  -58
  -61
  -63
  -67
  -70
  -74
  -77
  -81
  -85
  -89
  -93
  -98
  -103
Free cash flow, $m
  37
  75
  91
  110
  130
  152
  174
  198
  222
  248
  275
  296
  325
  356
  387
  420
  454
  490
  527
  565
  606
  647
  691
  737
  784
  834
  886
  941
  998
  1,057
  1,119
Issuance/(repayment) of debt, $m
  -6
  27
  28
  30
  31
  33
  34
  36
  37
  39
  40
  42
  44
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  80
  84
  88
  92
Issuance/(repurchase) of shares, $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
  0
Cash from financing (excl. dividends), $m  
  -30
  27
  28
  30
  31
  33
  34
  36
  37
  39
  40
  42
  44
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  80
  84
  88
  92
Total cash flow (excl. dividends), $m
  7
  102
  119
  140
  161
  184
  208
  233
  260
  287
  315
  338
  369
  401
  434
  469
  505
  543
  582
  623
  665
  710
  756
  804
  855
  908
  963
  1,021
  1,082
  1,145
  1,211
Retained Cash Flow (-), $m
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -52
  -54
  -56
  -58
  -60
  -63
  -65
  -68
  -70
  -73
  -76
  -80
  -83
  -87
  -90
  -94
  -99
  -103
  -108
  -113
Prev. year cash balance distribution, $m
 
  24
  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
 
  94
  85
  103
  123
  144
  166
  189
  214
  239
  266
  287
  315
  345
  377
  409
  443
  478
  514
  552
  592
  633
  676
  721
  768
  817
  869
  922
  978
  1,037
  1,099
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
 
  90
  78
  90
  101
  112
  121
  128
  134
  137
  139
  136
  135
  131
  126
  120
  112
  104
  95
  85
  75
  66
  56
  47
  39
  32
  25
  20
  15
  11
  8
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

Sleep Country Canada Holdings Inc. operates as a specialty mattress retailer in Canada. The company offers a range of mattresses; and sleep related products and accessories, such as bed frames, pillows, mattress pads, sheets, duvets, headboards, and footboards. As of June 10, 2016, it operated 231 corporate-owned stores, including 181 Sleep Country stores across Canada and 50 Dormez-vous stores in Quebec. The company was founded in 1994 and is headquartered in Toronto, Canada. Sleep Country Canada Holdings Inc. is a subsidiary of Birch Hill Equity Partners Management Inc.

FINANCIAL RATIOS  of  Sleep Country Canada Holdings Inc. (ZZZ)

Valuation Ratios
P/E Ratio 29.6
Price to Sales 2.8
Price to Book 5.6
Price to Tangible Book
Price to Cash Flow 27.4
Price to Free Cash Flow 40
Growth Rates
Sales Growth Rate 14.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 13.3%
Cap. Spend. - 3 Yr. Gr. Rate 4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 44.9%
Total Debt to Equity 44.9%
Interest Coverage 18
Management Effectiveness
Return On Assets 11.8%
Ret/ On Assets - 3 Yr. Avg. -0.9%
Return On Total Capital 13.5%
Ret/ On T. Cap. - 3 Yr. Avg. -3%
Return On Equity 20%
Return On Equity - 3 Yr. Avg. -15.9%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 28.8%
Gross Margin - 3 Yr. Avg. 27.6%
EBITDA Margin 15.8%
EBITDA Margin - 3 Yr. Avg. 1.3%
Operating Margin 13.7%
Oper. Margin - 3 Yr. Avg. 11.4%
Pre-Tax Margin 12.8%
Pre-Tax Margin - 3 Yr. Avg. -2.4%
Net Profit Margin 9.5%
Net Profit Margin - 3 Yr. Avg. -2.6%
Effective Tax Rate 25.4%
Eff/ Tax Rate - 3 Yr. Avg. 23.4%
Payout Ratio 0%

ZZZ stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ZZZ stock intrinsic value calculation we used $524 million for the last fiscal year's total revenue generated by Sleep Country Canada Holdings Inc.. The default revenue input number comes from 2016 income statement of Sleep Country Canada Holdings 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 ZZZ stock valuation model: a) initial revenue growth rate of 13.4% 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 ZZZ is calculated based on our internal credit rating of Sleep Country Canada Holdings 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 Sleep Country Canada Holdings 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 ZZZ stock the variable cost ratio is equal to 64.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $116 million in the base year in the intrinsic value calculation for ZZZ 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 Sleep Country Canada Holdings Inc..

Corporate tax rate of 27% is the nominal tax rate for Sleep Country Canada Holdings 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 ZZZ 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 ZZZ are equal to 25.9%.

Life of production assets of 31.5 years is the average useful life of capital assets used in Sleep Country Canada Holdings 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 ZZZ is equal to -1.3%. 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 - $265 million for Sleep Country Canada Holdings 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 38.18 million for Sleep Country Canada Holdings 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 Sleep Country Canada Holdings Inc. at the current share price and the inputted number of shares is $1.5 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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