Intrinsic value of Digi International - DGII

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$12.00

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$12.00

 
Intrinsic value

$11.11

 
Up/down potential

-7%

 
Rating

hold

 
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 DGII 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 0.3

 

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, %
  -0.49
  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
  203
  207
  212
  217
  223
  230
  238
  246
  254
  264
  274
  285
  296
  309
  322
  336
  350
  366
  382
  400
  418
  438
  458
  480
  502
  526
  551
  578
  606
  635
  666
Variable operating expenses, $m
 
  196
  200
  205
  210
  216
  223
  230
  238
  246
  255
  254
  264
  275
  287
  300
  313
  327
  341
  357
  373
  390
  409
  428
  448
  469
  492
  516
  540
  567
  594
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
  186
  196
  200
  205
  210
  216
  223
  230
  238
  246
  255
  254
  264
  275
  287
  300
  313
  327
  341
  357
  373
  390
  409
  428
  448
  469
  492
  516
  540
  567
  594
Operating income, $m
  17
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  31
  32
  33
  35
  36
  38
  39
  41
  43
  45
  47
  49
  52
  54
  57
  59
  62
  65
  68
  72
EBITDA, $m
  22
  23
  23
  24
  25
  25
  26
  27
  28
  29
  30
  31
  33
  34
  35
  37
  39
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  64
  67
  70
  73
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  3
Earnings before tax, $m
  17
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  30
  31
  33
  34
  35
  37
  38
  40
  42
  44
  46
  48
  50
  52
  55
  57
  60
  63
  66
  69
Tax expense, $m
  4
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  15
  16
  17
  18
  19
Net income, $m
  17
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  33
  35
  37
  38
  40
  42
  44
  46
  48
  50

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  134
  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
  336
  206
  211
  216
  222
  229
  236
  244
  253
  263
  273
  283
  295
  307
  320
  334
  349
  364
  380
  398
  416
  435
  456
  477
  500
  524
  549
  575
  603
  632
  663
Adjusted assets (=assets-cash), $m
  202
  206
  211
  216
  222
  229
  236
  244
  253
  263
  273
  283
  295
  307
  320
  334
  349
  364
  380
  398
  416
  435
  456
  477
  500
  524
  549
  575
  603
  632
  663
Revenue / Adjusted assets
  1.005
  1.005
  1.005
  1.005
  1.005
  1.004
  1.008
  1.008
  1.004
  1.004
  1.004
  1.007
  1.003
  1.007
  1.006
  1.006
  1.003
  1.005
  1.005
  1.005
  1.005
  1.007
  1.004
  1.006
  1.004
  1.004
  1.004
  1.005
  1.005
  1.005
  1.005
Average production assets, $m
  11
  11
  11
  12
  12
  12
  13
  13
  14
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
  34
  36
Working capital, $m
  172
  39
  40
  41
  42
  43
  44
  46
  48
  49
  51
  53
  55
  58
  60
  63
  66
  68
  72
  75
  78
  82
  86
  90
  94
  98
  103
  108
  113
  119
  125
Total debt, $m
  0
  1
  2
  2
  4
  5
  6
  8
  9
  11
  13
  14
  16
  19
  21
  23
  26
  29
  32
  35
  38
  41
  45
  49
  53
  57
  62
  66
  71
  76
  82
Total liabilities, $m
  36
  37
  38
  38
  40
  41
  42
  44
  45
  47
  49
  50
  52
  55
  57
  59
  62
  65
  68
  71
  74
  77
  81
  85
  89
  93
  98
  102
  107
  112
  118
Total equity, $m
  300
  169
  173
  178
  183
  188
  194
  201
  208
  216
  224
  233
  242
  252
  263
  275
  287
  299
  313
  327
  342
  358
  375
  392
  411
  430
  451
  473
  495
  519
  545
Total liabilities and equity, $m
  336
  206
  211
  216
  223
  229
  236
  245
  253
  263
  273
  283
  294
  307
  320
  334
  349
  364
  381
  398
  416
  435
  456
  477
  500
  523
  549
  575
  602
  631
  663
Debt-to-equity ratio
  0.000
  0.000
  0.010
  0.010
  0.020
  0.030
  0.030
  0.040
  0.040
  0.050
  0.060
  0.060
  0.070
  0.070
  0.080
  0.090
  0.090
  0.100
  0.100
  0.110
  0.110
  0.120
  0.120
  0.120
  0.130
  0.130
  0.140
  0.140
  0.140
  0.150
  0.150
Adjusted equity ratio
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822
  0.822

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  17
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  33
  35
  37
  38
  40
  42
  44
  46
  48
  50
Depreciation, amort., depletion, $m
  5
  11
  11
  11
  11
  11
  11
  11
  11
  12
  12
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
Funds from operations, $m
  29
  20
  20
  20
  21
  21
  22
  23
  23
  24
  25
  23
  24
  25
  26
  27
  28
  29
  30
  32
  33
  34
  36
  38
  39
  41
  43
  45
  47
  50
  52
Change in working capital, $m
  2
  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
  5
  6
Cash from operations, $m
  27
  27
  19
  19
  20
  20
  21
  21
  22
  22
  23
  21
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  38
  40
  42
  44
  46
Maintenance CAPEX, $m
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
New CAPEX, $m
  -3
  0
  0
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
Cash from investing activities, $m
  -4
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Free cash flow, $m
  23
  26
  18
  19
  19
  19
  20
  20
  21
  21
  22
  19
  20
  21
  22
  23
  23
  24
  25
  26
  28
  29
  30
  31
  33
  34
  36
  38
  39
  41
  43
Issuance/(repayment) of debt, $m
  0
  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
  5
Issuance/(repurchase) of shares, $m
  8
  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  
  8
  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
  5
Total cash flow (excl. dividends), $m
  31
  27
  19
  20
  20
  21
  21
  22
  22
  23
  24
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  37
  39
  40
  42
  44
  46
  48
Retained Cash Flow (-), $m
  -25
  -3
  -4
  -4
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
Prev. year cash balance distribution, $m
 
  134
  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
 
  158
  15
  15
  15
  15
  15
  15
  15
  15
  15
  13
  13
  13
  13
  14
  14
  14
  15
  15
  16
  16
  17
  18
  18
  19
  20
  21
  21
  22
  23
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
 
  151
  14
  13
  12
  12
  11
  10
  9
  9
  8
  6
  5
  5
  4
  4
  4
  3
  3
  2
  2
  2
  1
  1
  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
  100.0
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Digi International Inc. provides Internet of Things networking hardware products and solutions. The company provides cellular routers that offers connectivity for devices over a cellular data network; cellular gateway products that enable devices or groups of devices to be networked in locations where there is no existing network or where access to a network is prohibited; radio frequency products that utilize a range of wireless protocols for PC-to-device or device-to-device connectivity; and Connect, Rabbit, and ARM-based embedded systems on module and single board computers for medical, transportation, and industrial device manufacturers. It also offers console and serial servers, as well as universal serial bus (USB)-to-serial converters, USB over IP products, and multiport USB hubs. In addition, the company provides Digi Cold Chain Solutions, a system that enable restaurants, groceries, and convenience stores to monitor the temperature of food and other perishable goods; Digi device cloud, a platform as-a-service to collect, interpret, and utilize data from various devices to operate their businesses; and Digi Remote Manager, a centralized remote device management solution to meet service level commitments and stay compliant with payment card industry standards, as well as to monitor, diagnose, and fix remote devices. Further, it provides turn-key wireless networking product design, testing, and certification services for technology platforms and applications; and implementation planning, application development, on-site support, installation, and customer training services. The company sells its products through a network of distributors, systems integrators, and value added resellers for various businesses and institutions, as well as to original equipment manufacturers and others in North America, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. Digi International Inc. was founded in 1985 and is headquartered in Minnetonka, Minnesota.

FINANCIAL RATIOS  of  Digi International (DGII)

Valuation Ratios
P/E Ratio 18.4
Price to Sales 1.5
Price to Book 1
Price to Tangible Book
Price to Cash Flow 11.6
Price to Free Cash Flow 13
Growth Rates
Sales Growth Rate -0.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -40%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio NaN
Current Ratio 0.2
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 5.3%
Ret/ On Assets - 3 Yr. Avg. 2.8%
Return On Total Capital 5.9%
Ret/ On T. Cap. - 3 Yr. Avg. 3.1%
Return On Equity 5.9%
Return On Equity - 3 Yr. Avg. 3.1%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 49.3%
Gross Margin - 3 Yr. Avg. 48.7%
EBITDA Margin 10.8%
EBITDA Margin - 3 Yr. Avg. 9.1%
Operating Margin 8.4%
Oper. Margin - 3 Yr. Avg. 5.3%
Pre-Tax Margin 8.4%
Pre-Tax Margin - 3 Yr. Avg. 5.8%
Net Profit Margin 8.4%
Net Profit Margin - 3 Yr. Avg. 4.3%
Effective Tax Rate 23.5%
Eff/ Tax Rate - 3 Yr. Avg. 24.8%
Payout Ratio 0%

DGII stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DGII stock intrinsic value calculation we used $203 million for the last fiscal year's total revenue generated by Digi International. The default revenue input number comes from 2016 income statement of Digi International. 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 DGII 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 4.3%, whose default value for DGII is calculated based on our internal credit rating of Digi International, 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 Digi International.
    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 DGII stock the variable cost ratio is equal to 94.6%.

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 DGII 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 Digi International.

Corporate tax rate of 27% is the nominal tax rate for Digi International. 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 DGII 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 DGII are equal to 5.4%.

Life of production assets of 23.1 years is the average useful life of capital assets used in Digi International 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 DGII is equal to 18.7%. 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 - $300 million for Digi International - 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 26.655 million for Digi International 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 Digi International at the current share price and the inputted number of shares is $0.3 billion.


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COMPANY NEWS

▶ Digi International Enabling IoT in Space   [Mar-04-17 09:00AM  PR Newswire]
▶ Digi International Acquires SMART Temps   [Jan-09-17 04:05PM  PR Newswire]
▶ Compensation tumbles for CEO at Digi International Inc.   [Dec-16-16 01:40PM  at bizjournals.com]
▶ Clayton-based Belden goes public with bid letter to Digi board   [Dec-06-16 02:36PM  at bizjournals.com]
▶ Is Digi International Inc. (DGII) A Good Long-Term Holding?   [Dec-03-16 07:25PM  at Insider Monkey]
▶ Startup FreshTemp acquired by Digi International   [Nov-23-16 11:45AM  at bizjournals.com]
▶ Breaking Down Digi International's Big Price Run-Up   [Nov-22-16 06:43PM  at Motley Fool]
▶ Belden makes $380 million takeover bid for Digi   [09:10AM  at bizjournals.com]
▶ The Internet of Things Is Really All About Software   [Oct-22-16 11:22AM  at Motley Fool]
▶ Digi Connect Sensor Certified by AT&T   [Sep-07-16 09:00AM  PR Newswire]
▶ Two Small Tech Companies to Add to Your Watchlist   [Aug-22-16 06:32PM  at Motley Fool]
Stock chart of DGII Financial statements of DGII
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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