Intrinsic value of ARC Document Solutions - ARC

Previous Close

$2.56

  Intrinsic Value

$7.75

stock screener

  Rating & Target

str. buy

+203%

Previous close

$2.56

 
Intrinsic value

$7.75

 
Up/down potential

+203%

 
Rating

str. buy

We calculate the intrinsic value of ARC 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 0.1

 

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, %
  -5.36
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  406
  414
  424
  435
  447
  460
  475
  491
  509
  528
  548
  570
  593
  617
  644
  671
  701
  732
  765
  800
  836
  875
  916
  959
  1,004
  1,052
  1,103
  1,156
  1,211
  1,270
  1,332
Variable operating expenses, $m
 
  380
  389
  398
  409
  421
  434
  449
  464
  481
  499
  504
  524
  546
  569
  594
  620
  648
  677
  707
  740
  774
  810
  849
  889
  931
  976
  1,022
  1,072
  1,124
  1,178
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
  452
  380
  389
  398
  409
  421
  434
  449
  464
  481
  499
  504
  524
  546
  569
  594
  620
  648
  677
  707
  740
  774
  810
  849
  889
  931
  976
  1,022
  1,072
  1,124
  1,178
Operating income, $m
  -46
  34
  35
  36
  38
  39
  41
  43
  45
  47
  49
  66
  68
  71
  74
  77
  81
  84
  88
  92
  96
  101
  106
  111
  116
  121
  127
  133
  140
  146
  153
EBITDA, $m
  -14
  58
  59
  60
  62
  64
  66
  68
  71
  73
  76
  79
  82
  86
  89
  93
  97
  102
  106
  111
  116
  122
  127
  133
  140
  146
  153
  161
  168
  176
  185
Interest expense (income), $m
  6
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
  20
  21
Earnings before tax, $m
  -52
  29
  29
  31
  32
  33
  35
  36
  38
  40
  42
  58
  60
  62
  65
  68
  70
  74
  77
  80
  84
  88
  91
  96
  100
  105
  110
  115
  120
  126
  132
Tax expense, $m
  -4
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  16
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  36
Net income, $m
  -48
  21
  22
  22
  23
  24
  25
  26
  28
  29
  30
  42
  44
  46
  47
  49
  51
  54
  56
  59
  61
  64
  67
  70
  73
  76
  80
  84
  88
  92
  96

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  25
  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
  369
  351
  359
  368
  379
  390
  403
  416
  431
  447
  464
  483
  502
  523
  545
  569
  594
  620
  648
  678
  709
  742
  776
  813
  851
  892
  934
  979
  1,027
  1,076
  1,129
Adjusted assets (=assets-cash), $m
  344
  351
  359
  368
  379
  390
  403
  416
  431
  447
  464
  483
  502
  523
  545
  569
  594
  620
  648
  678
  709
  742
  776
  813
  851
  892
  934
  979
  1,027
  1,076
  1,129
Revenue / Adjusted assets
  1.180
  1.179
  1.181
  1.182
  1.179
  1.179
  1.179
  1.180
  1.181
  1.181
  1.181
  1.180
  1.181
  1.180
  1.182
  1.179
  1.180
  1.181
  1.181
  1.180
  1.179
  1.179
  1.180
  1.180
  1.180
  1.179
  1.181
  1.181
  1.179
  1.180
  1.180
Average production assets, $m
  75
  77
  78
  80
  83
  85
  88
  91
  94
  98
  101
  105
  110
  114
  119
  124
  130
  135
  141
  148
  155
  162
  169
  177
  186
  195
  204
  214
  224
  235
  246
Working capital, $m
  45
  35
  36
  37
  38
  39
  40
  41
  43
  44
  46
  48
  50
  52
  54
  56
  59
  61
  64
  67
  70
  74
  77
  81
  84
  88
  93
  97
  102
  107
  112
Total debt, $m
  157
  147
  152
  157
  164
  170
  178
  186
  195
  205
  215
  226
  237
  250
  263
  277
  292
  308
  324
  342
  360
  380
  401
  422
  445
  470
  495
  522
  550
  580
  611
Total liabilities, $m
  219
  209
  214
  219
  226
  232
  240
  248
  257
  267
  277
  288
  299
  312
  325
  339
  354
  370
  386
  404
  422
  442
  463
  484
  507
  532
  557
  584
  612
  642
  673
Total equity, $m
  150
  142
  145
  149
  153
  158
  163
  168
  174
  181
  188
  195
  203
  211
  220
  230
  240
  251
  262
  274
  286
  300
  314
  328
  344
  360
  378
  396
  415
  435
  456
Total liabilities and equity, $m
  369
  351
  359
  368
  379
  390
  403
  416
  431
  448
  465
  483
  502
  523
  545
  569
  594
  621
  648
  678
  708
  742
  777
  812
  851
  892
  935
  980
  1,027
  1,077
  1,129
Debt-to-equity ratio
  1.047
  1.040
  1.050
  1.060
  1.070
  1.080
  1.090
  1.110
  1.120
  1.130
  1.140
  1.160
  1.170
  1.180
  1.190
  1.210
  1.220
  1.230
  1.240
  1.250
  1.260
  1.270
  1.280
  1.290
  1.290
  1.300
  1.310
  1.320
  1.330
  1.330
  1.340
Adjusted equity ratio
  0.363
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404
  0.404

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -48
  21
  22
  22
  23
  24
  25
  26
  28
  29
  30
  42
  44
  46
  47
  49
  51
  54
  56
  59
  61
  64
  67
  70
  73
  76
  80
  84
  88
  92
  96
Depreciation, amort., depletion, $m
  32
  24
  24
  24
  24
  25
  25
  26
  26
  26
  27
  14
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  32
Funds from operations, $m
  49
  45
  45
  47
  48
  49
  50
  52
  54
  55
  57
  56
  58
  60
  63
  65
  68
  71
  74
  77
  81
  85
  89
  93
  97
  101
  106
  111
  117
  122
  128
Change in working capital, $m
  -4
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
Cash from operations, $m
  53
  44
  45
  46
  47
  48
  49
  51
  52
  54
  56
  54
  56
  58
  60
  63
  66
  68
  71
  75
  78
  81
  85
  89
  93
  97
  102
  107
  112
  117
  123
Maintenance CAPEX, $m
  0
  -10
  -10
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
New CAPEX, $m
  -12
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
Cash from investing activities, $m
  -11
  -12
  -12
  -12
  -12
  -14
  -14
  -14
  -15
  -15
  -17
  -17
  -18
  -19
  -20
  -20
  -21
  -23
  -23
  -24
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -40
  -41
Free cash flow, $m
  42
  33
  33
  34
  34
  35
  35
  36
  37
  38
  39
  37
  38
  39
  41
  43
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  78
  81
Issuance/(repayment) of debt, $m
  -34
  4
  5
  5
  6
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  30
  31
Issuance/(repurchase) of shares, $m
  -5
  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  
  -40
  4
  5
  5
  6
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  30
  31
Total cash flow (excl. dividends), $m
  1
  37
  38
  39
  40
  42
  43
  44
  46
  48
  50
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  77
  81
  85
  89
  93
  98
  102
  107
  112
Retained Cash Flow (-), $m
  52
  -3
  -3
  -4
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
Prev. year cash balance distribution, $m
 
  11
  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
 
  45
  35
  35
  36
  37
  38
  39
  40
  41
  43
  40
  42
  43
  45
  47
  49
  51
  53
  56
  58
  61
  63
  66
  69
  73
  76
  79
  83
  87
  91
Discount rate, %
 
  5.90
  6.20
  6.50
  6.83
  7.17
  7.53
  7.91
  8.30
  8.72
  9.15
  9.61
  10.09
  10.60
  11.13
  11.68
  12.27
  12.88
  13.52
  14.20
  14.91
  15.65
  16.44
  17.26
  18.12
  19.03
  19.98
  20.98
  22.03
  23.13
  24.29
PV of cash for distribution, $m
 
  43
  31
  29
  28
  26
  25
  23
  21
  19
  18
  15
  13
  12
  10
  9
  8
  7
  5
  4
  4
  3
  2
  2
  1
  1
  1
  0
  0
  0
  0
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
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ARC Document Solutions, Inc. (ARC) is a document solutions provider for the architectural, engineering and construction (AEC) industry. The Company also provides document solutions to businesses of various types. ARC's offerings include managed print services (MPS), offsite services, archive and information management (AIM), specialized color printing, Web-based document management applications, digital shipping/managed file transfer, and equipment and supplies sales. MPS is an onsite service where it installs a complete document solution platform in its customers' offices and project sites. Its Offsite Services offering operates over 180 offsite service centers. AIM enables its customers to store information and intellectual property in a cloud-based and searchable digital archive. The Specialized Color Printing offering is focused on color printing, finishing and assembly of graphic materials. Its Web-Based Document Management Applications develop and offer tools to its customers.

FINANCIAL RATIOS  of  ARC Document Solutions (ARC)

Valuation Ratios
P/E Ratio -2.5
Price to Sales 0.3
Price to Book 0.8
Price to Tangible Book
Price to Cash Flow 2.2
Price to Free Cash Flow 2.9
Growth Rates
Sales Growth Rate -5.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -14.3%
Cap. Spend. - 3 Yr. Gr. Rate -7.8%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 95.3%
Total Debt to Equity 104.7%
Interest Coverage -8
Management Effectiveness
Return On Assets -10.1%
Ret/ On Assets - 3 Yr. Avg. 7%
Return On Total Capital -14.1%
Ret/ On T. Cap. - 3 Yr. Avg. 5.6%
Return On Equity -27.3%
Return On Equity - 3 Yr. Avg. 14.5%
Asset Turnover 1
Profitability Ratios
Gross Margin 32.8%
Gross Margin - 3 Yr. Avg. 33.7%
EBITDA Margin -3.4%
EBITDA Margin - 3 Yr. Avg. 8.7%
Operating Margin -11.3%
Oper. Margin - 3 Yr. Avg. 0.8%
Pre-Tax Margin -12.8%
Pre-Tax Margin - 3 Yr. Avg. -1.3%
Net Profit Margin -11.8%
Net Profit Margin - 3 Yr. Avg. 4.1%
Effective Tax Rate 7.7%
Eff/ Tax Rate - 3 Yr. Avg. -69.6%
Payout Ratio 0%

ARC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ARC stock intrinsic value calculation we used $406 million for the last fiscal year's total revenue generated by ARC Document Solutions. The default revenue input number comes from 2016 income statement of ARC Document Solutions. 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 ARC stock valuation model: a) initial revenue growth rate of 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 5.9%, whose default value for ARC is calculated based on our internal credit rating of ARC Document Solutions, 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 ARC Document Solutions.
    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 ARC stock the variable cost ratio is equal to 91.9%.

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 ARC 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 3.7% for ARC Document Solutions.

Corporate tax rate of 27% is the nominal tax rate for ARC Document Solutions. 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 ARC 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 ARC are equal to 18.5%.

Life of production assets of 7.8 years is the average useful life of capital assets used in ARC Document Solutions 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 ARC is equal to 8.4%. 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 - $150 million for ARC Document Solutions - 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 46.439 million for ARC Document Solutions 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 ARC Document Solutions at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ ARC Document Solutions reports 3Q loss   [Nov-01-17 05:09PM  Associated Press]
▶ November Undervalued Stock Opportunities   [Oct-31-17 09:03AM  Simply Wall St.]
▶ Weekly Top Insider Buys Highlight for the Week of Oct. 6   [Oct-08-17 04:26PM  GuruFocus.com]
▶ ARC Document Solutions posts 2Q profit   [Aug-01-17 10:08PM  Associated Press]
▶ 9 Stocks Charles Brandes Continues to Buy   [Jun-01-17 03:13PM  GuruFocus.com]
▶ ARC Document Solutions posts 1Q profit   [May-02-17 06:29PM  Associated Press]
▶ Kleinfeld out as chair and CEO of Arconic   [10:10AM  American City Business Journals]
▶ Emerson (EMR) Business Wing Opens New Office in Germany   [Mar-30-17 09:14AM  Investopedia]
▶ ARC Document Solutions posts 4Q profit   [Feb-21-17 05:52PM  Associated Press]
Financial statements of ARC
Valuation of Stocks

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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