Deltic Timber Corporation, a natural resources company, engages in the growing and harvesting of timber; and manufacturing and marketing of lumber and medium density fiberboards (MDF) in the United States. The companys Woodlands segment harvests pine and hardwood pulpwood for sale to third parties for use in the manufacture of paper products; and provides timberland management services, such as harvesting and thinning operations, reforestation, cull timber removal programs, and introducing genetically improved seedlings. This segment also leases oil and gas, hunting land, and other rights on its timberlands; and provides harvest planning, silvicultural improvement, and maintenance works for timberlands. This segment owns approximately 530,000 acres of timberland primarily in Arkansas and north Louisiana. Its Manufacturing segment owns and operates two sawmills that manufacture and sell various softwood lumber products, such as dimension lumber, boards, and timbers primarily to wholesale distributors, large retailers, lumber treaters, industrial accounts, and truss manufacturers, as well as used in residential construction, roof trusses, remanufactured products, and laminated beams. This segment also produces wood chips, shavings, sawdust, and bark as by-products. In addition, the Manufacturing segment manufactures and markets MDF under the Solidium trade name for use in furniture, kitchen cabinets, laminate flooring, store fixtures, door parts, and moldings. This segment sells MDF to wholesalers, retailers, and manufacturers. The companys Real Estate segment develops and markets residential lots for homebuilders and individuals; and commercial sites for developers and businesses, as well as sells undeveloped acreage. It also leases retail and office space to third parties; resells existing homes; and operates a country club. Deltic Timber Corporation was founded in 1996 and is headquartered in El Dorado, Arkansas.
FINANCIAL RATIOS of Deltic Timber (DEL)
|Price to Sales||3.9|
|Price to Book||3.4|
|Price to Tangible Book|
|Price to Cash Flow||19.4|
|Price to Free Cash Flow||170.3|
|Sales Growth Rate||12.9%|
|Sales - 3 Yr. Growth Rate||%|
|EPS Growth Rate||%|
|EPS - 3 Yr. Growth Rate||%|
|Capital Spending Gr. Rate||39.3%|
|Cap. Spend. - 3 Yr. Gr. Rate||6.9%|
|LT Debt to Equity||96%|
|Total Debt to Equity||96%|
|Return On Assets||2.8%|
|Ret/ On Assets - 3 Yr. Avg.||2.8%|
|Return On Total Capital||1.9%|
|Ret/ On T. Cap. - 3 Yr. Avg.||2.4%|
|Return On Equity||3.6%|
|Return On Equity - 3 Yr. Avg.||4.1%|
|Gross Margin - 3 Yr. Avg.||29.3%|
|EBITDA Margin - 3 Yr. Avg.||19.1%|
|Oper. Margin - 3 Yr. Avg.||10.1%|
|Pre-Tax Margin - 3 Yr. Avg.||6.9%|
|Net Profit Margin||4.1%|
|Net Profit Margin - 3 Yr. Avg.||4.8%|
|Effective Tax Rate||30.8%|
|Eff/ Tax Rate - 3 Yr. Avg.||28.9%|
DEL stock valuation input parameters
Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DEL stock intrinsic value calculation we used $219 million for the last fiscal year's total revenue generated by Deltic Timber. The default revenue input number comes from 2016 income statement of Deltic Timber. 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 DEL stock valuation model: a) initial revenue growth rate of 3.9% 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 8.2%, whose default value for DEL is calculated based on our internal credit rating of Deltic Timber, 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 Deltic Timber.
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 DEL stock the variable cost ratio is equal to 59.8%.
Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $69 million in the base year in the intrinsic value calculation for DEL 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 3.9% for Deltic Timber.
Corporate tax rate of 27% is the nominal tax rate for Deltic Timber. 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 DEL 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 DEL are equal to 208%.
Life of production assets of 19.8 years is the average useful life of capital assets used in Deltic Timber 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 DEL is equal to 1.8%. 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 - $251 million for Deltic Timber - 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 11.994 million for Deltic Timber 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 Deltic Timber at the current share price and the inputted number of shares is $0.8 billion.
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