Intrinsic value of Eastern - EML

Previous Close

$25.15

  Intrinsic Value

$6.95

stock screener

  Rating & Target

str. sell

-72%

  Value-price divergence*

-34%

Previous close

$25.15

 
Intrinsic value

$6.95

 
Up/down potential

-72%

 
Rating

str. sell

 
Value-price divergence*

-34%

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

We calculate the intrinsic value of EML 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 0.2

 

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, %
  -4.83
  9.10
  8.69
  8.32
  7.99
  7.69
  7.42
  7.18
  6.96
  6.76
  6.59
  6.43
  6.29
  6.16
  6.04
  5.94
  5.84
  5.76
  5.68
  5.62
  5.55
  5.50
  5.45
  5.40
  5.36
  5.33
  5.29
  5.26
  5.24
  5.21
  5.19
Revenue, $m
  138
  151
  164
  177
  191
  206
  221
  237
  254
  271
  289
  307
  327
  347
  368
  390
  412
  436
  461
  487
  514
  542
  572
  603
  635
  669
  704
  741
  780
  821
  863
Variable operating expenses, $m
 
  142
  154
  167
  180
  193
  208
  222
  238
  254
  270
  286
  304
  323
  343
  363
  384
  406
  429
  453
  479
  505
  532
  561
  591
  623
  656
  690
  726
  764
  804
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
  126
  142
  154
  167
  180
  193
  208
  222
  238
  254
  270
  286
  304
  323
  343
  363
  384
  406
  429
  453
  479
  505
  532
  561
  591
  623
  656
  690
  726
  764
  804
Operating income, $m
  11
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  21
  23
  24
  25
  27
  28
  30
  32
  34
  35
  37
  39
  42
  44
  46
  49
  51
  54
  57
  59
EBITDA, $m
  15
  13
  14
  16
  17
  18
  19
  21
  22
  24
  25
  27
  29
  30
  32
  34
  36
  38
  40
  43
  45
  48
  50
  53
  56
  59
  62
  65
  68
  72
  76
Interest expense (income), $m
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
Earnings before tax, $m
  11
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  20
  21
  22
  23
  24
  26
  27
  29
  30
  32
  33
  35
  37
  39
  41
  43
  45
  47
  50
  52
Tax expense, $m
  3
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  12
  12
  13
  13
  14
Net income, $m
  8
  6
  7
  8
  8
  9
  9
  10
  11
  12
  12
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  35
  36
  38

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  23
  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
  124
  110
  120
  130
  140
  151
  162
  174
  186
  198
  211
  225
  239
  254
  269
  285
  302
  319
  338
  356
  376
  397
  419
  441
  465
  490
  516
  543
  571
  601
  632
Adjusted assets (=assets-cash), $m
  101
  110
  120
  130
  140
  151
  162
  174
  186
  198
  211
  225
  239
  254
  269
  285
  302
  319
  338
  356
  376
  397
  419
  441
  465
  490
  516
  543
  571
  601
  632
Revenue / Adjusted assets
  1.366
  1.373
  1.367
  1.362
  1.364
  1.364
  1.364
  1.362
  1.366
  1.369
  1.370
  1.364
  1.368
  1.366
  1.368
  1.368
  1.364
  1.367
  1.364
  1.368
  1.367
  1.365
  1.365
  1.367
  1.366
  1.365
  1.364
  1.365
  1.366
  1.366
  1.366
Average production assets, $m
  28
  31
  33
  36
  39
  42
  45
  48
  52
  55
  59
  62
  66
  70
  75
  79
  84
  89
  94
  99
  104
  110
  116
  122
  129
  136
  143
  150
  158
  167
  175
Working capital, $m
  65
  47
  51
  55
  60
  64
  69
  74
  79
  85
  90
  96
  102
  108
  115
  122
  129
  136
  144
  152
  160
  169
  178
  188
  198
  209
  220
  231
  243
  256
  269
Total debt, $m
  2
  5
  9
  13
  17
  21
  26
  31
  35
  41
  46
  51
  57
  63
  69
  76
  83
  90
  97
  105
  113
  121
  130
  139
  149
  159
  169
  180
  192
  204
  217
Total liabilities, $m
  42
  45
  49
  53
  57
  61
  66
  71
  75
  81
  86
  91
  97
  103
  109
  116
  123
  130
  137
  145
  153
  161
  170
  179
  189
  199
  209
  220
  232
  244
  257
Total equity, $m
  82
  65
  71
  77
  83
  90
  96
  103
  110
  118
  126
  134
  142
  151
  160
  169
  179
  190
  200
  212
  224
  236
  249
  262
  276
  291
  306
  322
  339
  357
  375
Total liabilities and equity, $m
  124
  110
  120
  130
  140
  151
  162
  174
  185
  199
  212
  225
  239
  254
  269
  285
  302
  320
  337
  357
  377
  397
  419
  441
  465
  490
  515
  542
  571
  601
  632
Debt-to-equity ratio
  0.024
  0.070
  0.120
  0.160
  0.200
  0.240
  0.270
  0.300
  0.320
  0.340
  0.370
  0.380
  0.400
  0.420
  0.430
  0.450
  0.460
  0.470
  0.480
  0.490
  0.500
  0.510
  0.520
  0.530
  0.540
  0.550
  0.550
  0.560
  0.570
  0.570
  0.580
Adjusted equity ratio
  0.584
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594
  0.594

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  8
  6
  7
  8
  8
  9
  9
  10
  11
  12
  12
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  35
  36
  38
Depreciation, amort., depletion, $m
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  15
  16
Funds from operations, $m
  12
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  27
  28
  30
  31
  33
  35
  36
  38
  40
  42
  45
  47
  49
  52
  54
Change in working capital, $m
  0
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
Cash from operations, $m
  12
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  21
  22
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
Maintenance CAPEX, $m
  0
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -15
New CAPEX, $m
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
Cash from investing activities, $m
  -3
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -14
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
Free cash flow, $m
  9
  2
  2
  2
  3
  3
  3
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  15
  15
  16
  17
Issuance/(repayment) of debt, $m
  -1
  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
  11
  11
  12
  12
  13
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  
  -1
  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
  11
  11
  12
  12
  13
Total cash flow (excl. dividends), $m
  8
  5
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
Retained Cash Flow (-), $m
  -3
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
Prev. year cash balance distribution, $m
 
  22
  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
 
  22
  0
  0
  1
  1
  1
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  11
  11
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
 
  21
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  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
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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  100.0
  100.0

The Eastern Company manufactures and sells industrial hardware, security products, and metal products in the United States and internationally. The company’s Industrial Hardware segment offers passenger restraint locks, slam and draw latches, dead bolt latches, compression latches, cam-type vehicular locks, hinges, tool box locks, light-weight sleeper boxes, school bus door closure hardware, and vents for Class 8 trucks. Its products are used in tractor-trailer trucks, moving vans, off-road construction and farming equipment, school buses, military vehicles, recreational boats, pickup trucks, sport utility vehicles, and fire and rescue vehicles. This segment also provides fasteners and other closure devices; and plastic injection moldings. The company’s Security Products segment offers electronic and mechanical locking devices for computer, electronics, vending, and gaming industries. Its products also include timers, drop meters, coin chutes, money boxes, meter cases, smart cards, value transfer stations, smart card readers, card management software, access control units, oven door latches, oven door switches, and smoke eliminators. In addition, this segment provides coin acceptors and other coin security products for the commercial laundry markets; hardware and accessories for the appliance industry; and printed circuit boards and other electronic assemblies for industrial controls, medical, and military markets. The company’s Metal Products segment offers expansion shells to support the roofs of underground mines; and specialty malleable and ductile iron castings. This segment’s products include mine roof support anchors, couplers for railroad braking systems, support anchoring for construction, and couplers/fittings for utility industries. The company sells its products to original equipment manufacturers, distributors, route operators, and locksmiths, as well as directly to mines. The Eastern Company was founded in 1858 and is based in Naugatuck, Connecticut.

FINANCIAL RATIOS  of  Eastern (EML)

Valuation Ratios
P/E Ratio 19.7
Price to Sales 1.1
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 13.1
Price to Free Cash Flow 17.5
Growth Rates
Sales Growth Rate -4.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate -12.9%
Financial Strength
Quick Ratio 23
Current Ratio 0.1
LT Debt to Equity 1.2%
Total Debt to Equity 2.4%
Interest Coverage 0
Management Effectiveness
Return On Assets 6.5%
Ret/ On Assets - 3 Yr. Avg. 6.1%
Return On Total Capital 9.6%
Ret/ On T. Cap. - 3 Yr. Avg. 8.9%
Return On Equity 9.9%
Return On Equity - 3 Yr. Avg. 9.3%
Asset Turnover 1.1
Profitability Ratios
Gross Margin 24.6%
Gross Margin - 3 Yr. Avg. 23.1%
EBITDA Margin 10.9%
EBITDA Margin - 3 Yr. Avg. 9.9%
Operating Margin 8.7%
Oper. Margin - 3 Yr. Avg. 7.6%
Pre-Tax Margin 8%
Pre-Tax Margin - 3 Yr. Avg. 7.3%
Net Profit Margin 5.8%
Net Profit Margin - 3 Yr. Avg. 5.2%
Effective Tax Rate 27.3%
Eff/ Tax Rate - 3 Yr. Avg. 28.5%
Payout Ratio 37.5%

EML stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EML stock intrinsic value calculation we used $138 million for the last fiscal year's total revenue generated by Eastern. The default revenue input number comes from 2016 income statement of Eastern. 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 EML stock valuation model: a) initial revenue growth rate of 9.1% 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 EML is calculated based on our internal credit rating of Eastern, 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 Eastern.
    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 EML stock the variable cost ratio is equal to 94.2%.

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 EML 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 Eastern.

Corporate tax rate of 27% is the nominal tax rate for Eastern. 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 EML 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 EML are equal to 20.3%.

Life of production assets of 10.8 years is the average useful life of capital assets used in Eastern 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 EML is equal to 31.2%. 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 - $82 million for Eastern - 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 6.206 million for Eastern 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 Eastern at the current share price and the inputted number of shares is $0.2 billion.

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COMPANY NEWS

▶ Eastern posts 2Q profit   [Aug-04-17 02:50AM  Associated Press]
▶ ETFs with exposure to The Eastern Co. : June 22, 2017   [Jun-22-17 03:40PM  Capital Cube]
▶ Eastern posts 1Q profit   [May-02-17 06:35PM  Associated Press]
▶ ETFs with exposure to The Eastern Co. : April 11, 2017   [Apr-11-17 02:17PM  Capital Cube]
▶ Eastern Announces the Acquisition of Velvac   [Apr-04-17 07:00AM  Business Wire]
▶ Is 75 Too Old for the Boardroom? It Depends   [12:43PM  TheStreet.com]
▶ Eastern posts 4Q profit   [Feb-10-17 04:52PM  Associated Press]
▶ [$$] Eastern Union Rewrites the Rules   [Jan-25-16 12:15AM  at The Wall Street Journal]
▶ Should You Avoid Cerulean Pharma Inc (CERU)?   [Nov-29  12:38PM  at Insider Monkey]
▶ This Metric Says To Be Wary Of BRT Realty Trust (BRT)   [Nov-23  02:53PM  at Insider Monkey]
▶ Germany Imposes Border Controls For Migrants   [Sep-14  09:21AM  at MarketWatch]
▶ 10-Q for Eastern Co.   [Aug-03  08:09PM  at Company Spotlight]
Stock chart of EML Financial statements of EML
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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