Intrinsic value of Franklin Electric - FELE

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$40.10

  Intrinsic Value

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  Value-price divergence*

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

We calculate the intrinsic value of FELE 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 1.8

 

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, %
  2.70
  2.70
  2.93
  3.14
  3.32
  3.49
  3.64
  3.78
  3.90
  4.01
  4.11
  4.20
  4.28
  4.35
  4.42
  4.47
  4.53
  4.57
  4.62
  4.65
  4.69
  4.72
  4.75
  4.77
  4.80
  4.82
  4.83
  4.85
  4.87
  4.88
  4.89
Revenue, $m
  950
  976
  1,004
  1,036
  1,070
  1,108
  1,148
  1,191
  1,238
  1,287
  1,340
  1,396
  1,456
  1,520
  1,587
  1,658
  1,733
  1,812
  1,896
  1,984
  2,077
  2,175
  2,278
  2,387
  2,501
  2,622
  2,749
  2,882
  3,022
  3,170
  3,325
Variable operating expenses, $m
 
  176
  180
  184
  189
  194
  200
  206
  213
  220
  228
  200
  208
  217
  227
  237
  248
  259
  271
  284
  297
  311
  326
  342
  358
  375
  393
  412
  432
  454
  476
Fixed operating expenses, $m
 
  702
  720
  738
  756
  775
  794
  814
  835
  855
  877
  899
  921
  944
  968
  992
  1,017
  1,042
  1,068
  1,095
  1,122
  1,151
  1,179
  1,209
  1,239
  1,270
  1,302
  1,334
  1,368
  1,402
  1,437
Total operating expenses, $m
  839
  878
  900
  922
  945
  969
  994
  1,020
  1,048
  1,075
  1,105
  1,099
  1,129
  1,161
  1,195
  1,229
  1,265
  1,301
  1,339
  1,379
  1,419
  1,462
  1,505
  1,551
  1,597
  1,645
  1,695
  1,746
  1,800
  1,856
  1,913
Operating income, $m
  111
  98
  105
  114
  125
  138
  153
  170
  190
  212
  236
  298
  327
  358
  392
  428
  468
  510
  556
  605
  657
  713
  773
  837
  904
  977
  1,054
  1,135
  1,222
  1,314
  1,412
EBITDA, $m
  147
  148
  155
  164
  176
  190
  205
  223
  243
  266
  290
  317
  347
  379
  414
  452
  492
  536
  583
  633
  686
  744
  805
  870
  940
  1,013
  1,092
  1,176
  1,264
  1,359
  1,459
Interest expense (income), $m
  9
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  25
  26
  28
  30
  31
  33
  35
  37
Earnings before tax, $m
  104
  92
  99
  108
  118
  131
  145
  162
  181
  202
  225
  287
  315
  345
  378
  414
  452
  494
  538
  586
  637
  691
  750
  812
  878
  949
  1,024
  1,104
  1,189
  1,279
  1,375
Tax expense, $m
  25
  25
  27
  29
  32
  35
  39
  44
  49
  55
  61
  77
  85
  93
  102
  112
  122
  133
  145
  158
  172
  187
  202
  219
  237
  256
  276
  298
  321
  345
  371
Net income, $m
  79
  67
  72
  79
  86
  95
  106
  118
  132
  147
  164
  209
  230
  252
  276
  302
  330
  360
  393
  428
  465
  505
  547
  593
  641
  693
  748
  806
  868
  934
  1,003

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  104
  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
  1,040
  961
  989
  1,020
  1,054
  1,091
  1,131
  1,174
  1,219
  1,268
  1,320
  1,376
  1,435
  1,497
  1,563
  1,633
  1,707
  1,785
  1,868
  1,954
  2,046
  2,143
  2,244
  2,352
  2,464
  2,583
  2,708
  2,839
  2,978
  3,123
  3,276
Adjusted assets (=assets-cash), $m
  936
  961
  989
  1,020
  1,054
  1,091
  1,131
  1,174
  1,219
  1,268
  1,320
  1,376
  1,435
  1,497
  1,563
  1,633
  1,707
  1,785
  1,868
  1,954
  2,046
  2,143
  2,244
  2,352
  2,464
  2,583
  2,708
  2,839
  2,978
  3,123
  3,276
Revenue / Adjusted assets
  1.015
  1.016
  1.015
  1.016
  1.015
  1.016
  1.015
  1.014
  1.016
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
  1.015
Average production assets, $m
  331
  170
  175
  180
  186
  193
  200
  207
  215
  224
  233
  243
  253
  264
  276
  288
  301
  315
  330
  345
  361
  378
  396
  415
  435
  456
  478
  501
  526
  552
  578
Working capital, $m
  326
  262
  270
  279
  288
  298
  309
  320
  333
  346
  361
  376
  392
  409
  427
  446
  466
  487
  510
  534
  559
  585
  613
  642
  673
  705
  739
  775
  813
  853
  894
Total debt, $m
  190
  167
  179
  192
  206
  221
  238
  256
  275
  295
  317
  340
  365
  391
  418
  448
  479
  511
  546
  582
  620
  661
  703
  748
  795
  845
  897
  952
  1,010
  1,070
  1,134
Total liabilities, $m
  426
  402
  414
  427
  441
  456
  473
  491
  510
  530
  552
  575
  600
  626
  653
  683
  714
  746
  781
  817
  855
  896
  938
  983
  1,030
  1,080
  1,132
  1,187
  1,245
  1,305
  1,369
Total equity, $m
  613
  559
  576
  594
  614
  635
  658
  683
  710
  738
  768
  801
  835
  871
  910
  950
  994
  1,039
  1,087
  1,138
  1,191
  1,247
  1,306
  1,369
  1,434
  1,503
  1,576
  1,652
  1,733
  1,817
  1,906
Total liabilities and equity, $m
  1,039
  961
  990
  1,021
  1,055
  1,091
  1,131
  1,174
  1,220
  1,268
  1,320
  1,376
  1,435
  1,497
  1,563
  1,633
  1,708
  1,785
  1,868
  1,955
  2,046
  2,143
  2,244
  2,352
  2,464
  2,583
  2,708
  2,839
  2,978
  3,122
  3,275
Debt-to-equity ratio
  0.310
  0.300
  0.310
  0.320
  0.340
  0.350
  0.360
  0.370
  0.390
  0.400
  0.410
  0.420
  0.440
  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
  0.580
  0.580
  0.590
  0.590
Adjusted equity ratio
  0.544
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582
  0.582

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  79
  67
  72
  79
  86
  95
  106
  118
  132
  147
  164
  209
  230
  252
  276
  302
  330
  360
  393
  428
  465
  505
  547
  593
  641
  693
  748
  806
  868
  934
  1,003
Depreciation, amort., depletion, $m
  36
  50
  50
  51
  51
  52
  52
  53
  53
  54
  55
  20
  20
  21
  22
  23
  24
  25
  27
  28
  29
  31
  32
  33
  35
  37
  39
  40
  42
  44
  47
Funds from operations, $m
  106
  117
  122
  129
  137
  147
  158
  171
  186
  202
  219
  229
  250
  273
  298
  325
  354
  386
  419
  455
  494
  535
  579
  626
  676
  729
  786
  846
  910
  978
  1,050
Change in working capital, $m
  -9
  7
  8
  8
  9
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
  38
  40
  42
Cash from operations, $m
  115
  -55
  115
  121
  128
  137
  147
  159
  173
  188
  205
  214
  234
  256
  280
  306
  334
  364
  397
  432
  469
  509
  551
  597
  645
  697
  752
  810
  872
  938
  1,008
Maintenance CAPEX, $m
  0
  -13
  -14
  -14
  -15
  -15
  -16
  -16
  -17
  -17
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -37
  -39
  -40
  -42
  -44
New CAPEX, $m
  -39
  -4
  -5
  -5
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
Cash from investing activities, $m
  -34
  -17
  -19
  -19
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -49
  -51
  -53
  -56
  -59
  -62
  -64
  -68
  -71
Free cash flow, $m
  81
  -73
  96
  101
  108
  115
  125
  136
  148
  162
  178
  185
  204
  225
  247
  272
  298
  326
  357
  390
  425
  463
  503
  546
  592
  641
  693
  749
  808
  870
  937
Issuance/(repayment) of debt, $m
  -30
  11
  12
  13
  14
  15
  17
  18
  19
  20
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  43
  45
  47
  50
  52
  55
  58
  61
  64
Issuance/(repurchase) of shares, $m
  -2
  6
  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  
  -33
  17
  12
  13
  14
  15
  17
  18
  19
  20
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  43
  45
  47
  50
  52
  55
  58
  61
  64
Total cash flow (excl. dividends), $m
  42
  -62
  108
  114
  122
  131
  141
  154
  167
  183
  200
  208
  229
  251
  275
  301
  329
  359
  391
  426
  463
  503
  546
  591
  639
  691
  745
  804
  865
  931
  1,001
Retained Cash Flow (-), $m
  -55
  -14
  -16
  -18
  -20
  -21
  -23
  -25
  -27
  -28
  -30
  -32
  -34
  -36
  -38
  -41
  -43
  -45
  -48
  -51
  -53
  -56
  -59
  -62
  -66
  -69
  -73
  -76
  -80
  -85
  -89
Prev. year cash balance distribution, $m
 
  70
  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
 
  0
  91
  96
  102
  109
  118
  129
  141
  154
  169
  176
  194
  214
  236
  260
  286
  313
  343
  375
  410
  447
  486
  528
  574
  622
  673
  727
  785
  847
  912
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
 
  0
  84
  83
  84
  85
  86
  87
  88
  89
  89
  84
  83
  82
  79
  76
  73
  68
  63
  58
  52
  46
  40
  35
  29
  24
  20
  16
  12
  9
  7
Current shareholders' claim on cash, %
  100
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6
  99.6

Franklin Electric Co., Inc., together with its subsidiaries, designs, manufactures, and distributes water and fuel pumping systems worldwide. It operates in two segments, Water Systems and Fueling Systems. The Water Systems segment offers motors, pumps, electronic controls, and related parts and equipment. Its motors and pumps are used principally for pumping clean water and wastewater in various residential, agricultural, and industrial applications; and electronic drives and controls are used in motors, which control functionality and provide protection from various hazards, such as electric surges, over-heating, or dry wells or tanks. The Fueling Systems segment provides pumps, pipes, sumps, fittings, vapor recovery components, electronic controls, monitoring devices, and related parts and equipment primarily for use in submersible fueling system applications. It integrates and sells motors and electronic controls produced by the Water Systems segment. The company sells its products to specialty distributors, original equipment manufacturers, industrial and petroleum equipment distributors, and oil and utility companies. Franklin Electric Co., Inc. was founded in 1944 and is headquartered in Fort Wayne, Indiana.

FINANCIAL RATIOS  of  Franklin Electric (FELE)

Valuation Ratios
P/E Ratio 23.5
Price to Sales 2
Price to Book 3
Price to Tangible Book
Price to Cash Flow 16.2
Price to Free Cash Flow 24.5
Growth Rates
Sales Growth Rate 2.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 50%
Cap. Spend. - 3 Yr. Gr. Rate -10.5%
Financial Strength
Quick Ratio 3
Current Ratio 0.2
LT Debt to Equity 25.4%
Total Debt to Equity 31%
Interest Coverage 13
Management Effectiveness
Return On Assets 8.4%
Ret/ On Assets - 3 Yr. Avg. 7.9%
Return On Total Capital 10%
Ret/ On T. Cap. - 3 Yr. Avg. 9.5%
Return On Equity 13.5%
Return On Equity - 3 Yr. Avg. 12.6%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 34.8%
Gross Margin - 3 Yr. Avg. 33.3%
EBITDA Margin 15.7%
EBITDA Margin - 3 Yr. Avg. 14.3%
Operating Margin 11.7%
Oper. Margin - 3 Yr. Avg. 10.3%
Pre-Tax Margin 10.9%
Pre-Tax Margin - 3 Yr. Avg. 9.6%
Net Profit Margin 8.3%
Net Profit Margin - 3 Yr. Avg. 7.6%
Effective Tax Rate 24%
Eff/ Tax Rate - 3 Yr. Avg. 19.7%
Payout Ratio 24.1%

FELE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FELE stock intrinsic value calculation we used $950 million for the last fiscal year's total revenue generated by Franklin Electric. The default revenue input number comes from 2016 income statement of Franklin Electric. 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 FELE stock valuation model: a) initial revenue growth rate of 2.7% 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 FELE is calculated based on our internal credit rating of Franklin Electric, 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 Franklin Electric.
    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 FELE stock the variable cost ratio is equal to 18.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $685 million in the base year in the intrinsic value calculation for FELE 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 Franklin Electric.

Corporate tax rate of 27% is the nominal tax rate for Franklin Electric. 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 FELE 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 FELE are equal to 17.4%.

Life of production assets of 12.4 years is the average useful life of capital assets used in Franklin Electric 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 FELE is equal to 26.9%. 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 - $615 million for Franklin Electric - 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 44.776 million for Franklin Electric 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 Franklin Electric at the current share price and the inputted number of shares is $1.8 billion.


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COMPANY NEWS

▶ Franklin Electric misses Street 1Q forecasts   [Apr-27-17 08:58AM  Associated Press]
▶ Franklin Electric meets 4Q profit forecasts   [09:05AM  Associated Press]
▶ INCON Wins First R&D 100 Award   [Nov-17-16 09:00AM  GlobeNewswire]
▶ Franklin Electric Wins First R&D 100 Award   [09:00AM  GlobeNewswire]
▶ [$$] Time to Take Profits in Two Small Stocks   [Jul-30-16 12:01AM  at Barrons.com]
Stock chart of FELE Financial statements of FELE Annual reports of FELE
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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