Intrinsic value of Federal Signal - FSS

Previous Close

$18.53

  Intrinsic Value

$21.71

stock screener

  Rating & Target

hold

+17%

  Value-price divergence*

-36%

Previous close

$18.53

 
Intrinsic value

$21.71

 
Up/down potential

+17%

 
Rating

hold

 
Value-price divergence*

-36%

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

We calculate the intrinsic value of FSS 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 1.1

 

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, %
  -7.81
  2.90
  3.11
  3.30
  3.47
  3.62
  3.76
  3.88
  4.00
  4.10
  4.19
  4.27
  4.34
  4.41
  4.47
  4.52
  4.57
  4.61
  4.65
  4.68
  4.72
  4.74
  4.77
  4.79
  4.81
  4.83
  4.85
  4.86
  4.88
  4.89
  4.90
Revenue, $m
  708
  729
  751
  776
  803
  832
  863
  897
  933
  971
  1,011
  1,055
  1,100
  1,149
  1,200
  1,254
  1,312
  1,372
  1,436
  1,503
  1,574
  1,649
  1,728
  1,810
  1,898
  1,989
  2,086
  2,187
  2,294
  2,406
  2,524
Variable operating expenses, $m
 
  169
  174
  179
  184
  190
  196
  203
  210
  217
  226
  210
  220
  229
  239
  250
  262
  274
  287
  300
  314
  329
  345
  361
  379
  397
  416
  436
  458
  480
  504
Fixed operating expenses, $m
 
  510
  523
  536
  550
  563
  578
  592
  607
  622
  637
  653
  670
  686
  704
  721
  739
  758
  777
  796
  816
  836
  857
  879
  901
  923
  946
  970
  994
  1,019
  1,045
Total operating expenses, $m
  651
  679
  697
  715
  734
  753
  774
  795
  817
  839
  863
  863
  890
  915
  943
  971
  1,001
  1,032
  1,064
  1,096
  1,130
  1,165
  1,202
  1,240
  1,280
  1,320
  1,362
  1,406
  1,452
  1,499
  1,549
Operating income, $m
  57
  49
  54
  61
  69
  79
  90
  102
  116
  131
  148
  191
  211
  233
  257
  283
  311
  341
  373
  407
  444
  483
  526
  570
  618
  669
  723
  781
  842
  907
  976
EBITDA, $m
  76
  76
  82
  89
  97
  107
  118
  130
  144
  160
  177
  196
  217
  239
  263
  289
  317
  347
  380
  415
  452
  492
  534
  579
  628
  679
  734
  792
  853
  919
  988
Interest expense (income), $m
  1
  2
  2
  3
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
Earnings before tax, $m
  57
  47
  52
  58
  66
  75
  86
  98
  112
  127
  143
  185
  205
  226
  249
  275
  302
  331
  362
  396
  432
  471
  512
  556
  602
  652
  705
  762
  822
  885
  953
Tax expense, $m
  18
  13
  14
  16
  18
  20
  23
  26
  30
  34
  39
  50
  55
  61
  67
  74
  81
  89
  98
  107
  117
  127
  138
  150
  163
  176
  190
  206
  222
  239
  257
Net income, $m
  44
  34
  38
  43
  48
  55
  63
  72
  81
  92
  104
  135
  149
  165
  182
  201
  220
  242
  265
  289
  315
  344
  374
  406
  440
  476
  515
  556
  600
  646
  695

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  51
  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
  643
  609
  628
  649
  671
  696
  722
  750
  780
  812
  846
  882
  920
  961
  1,004
  1,049
  1,097
  1,147
  1,201
  1,257
  1,316
  1,379
  1,444
  1,514
  1,587
  1,663
  1,744
  1,829
  1,918
  2,012
  2,110
Adjusted assets (=assets-cash), $m
  592
  609
  628
  649
  671
  696
  722
  750
  780
  812
  846
  882
  920
  961
  1,004
  1,049
  1,097
  1,147
  1,201
  1,257
  1,316
  1,379
  1,444
  1,514
  1,587
  1,663
  1,744
  1,829
  1,918
  2,012
  2,110
Revenue / Adjusted assets
  1.196
  1.197
  1.196
  1.196
  1.197
  1.195
  1.195
  1.196
  1.196
  1.196
  1.195
  1.196
  1.196
  1.196
  1.195
  1.195
  1.196
  1.196
  1.196
  1.196
  1.196
  1.196
  1.197
  1.196
  1.196
  1.196
  1.196
  1.196
  1.196
  1.196
  1.196
Average production assets, $m
  53
  55
  56
  58
  60
  62
  65
  67
  70
  73
  76
  79
  83
  86
  90
  94
  98
  103
  108
  113
  118
  124
  130
  136
  142
  149
  156
  164
  172
  180
  189
Working capital, $m
  175
  129
  133
  137
  142
  147
  153
  159
  165
  172
  179
  187
  195
  203
  212
  222
  232
  243
  254
  266
  279
  292
  306
  320
  336
  352
  369
  387
  406
  426
  447
Total debt, $m
  64
  70
  78
  87
  96
  106
  117
  129
  142
  155
  169
  184
  201
  217
  235
  254
  275
  296
  318
  342
  367
  393
  420
  449
  480
  512
  546
  581
  619
  658
  699
Total liabilities, $m
  249
  255
  263
  272
  281
  291
  302
  314
  327
  340
  354
  369
  386
  402
  420
  439
  460
  481
  503
  527
  552
  578
  605
  634
  665
  697
  731
  766
  804
  843
  884
Total equity, $m
  394
  354
  365
  377
  390
  404
  419
  436
  453
  472
  491
  512
  535
  558
  583
  609
  637
  667
  698
  730
  765
  801
  839
  879
  922
  966
  1,013
  1,062
  1,114
  1,169
  1,226
Total liabilities and equity, $m
  643
  609
  628
  649
  671
  695
  721
  750
  780
  812
  845
  881
  921
  960
  1,003
  1,048
  1,097
  1,148
  1,201
  1,257
  1,317
  1,379
  1,444
  1,513
  1,587
  1,663
  1,744
  1,828
  1,918
  2,012
  2,110
Debt-to-equity ratio
  0.162
  0.200
  0.210
  0.230
  0.250
  0.260
  0.280
  0.300
  0.310
  0.330
  0.340
  0.360
  0.380
  0.390
  0.400
  0.420
  0.430
  0.440
  0.460
  0.470
  0.480
  0.490
  0.500
  0.510
  0.520
  0.530
  0.540
  0.550
  0.560
  0.560
  0.570
Adjusted equity ratio
  0.579
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581
  0.581

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  44
  34
  38
  43
  48
  55
  63
  72
  81
  92
  104
  135
  149
  165
  182
  201
  220
  242
  265
  289
  315
  344
  374
  406
  440
  476
  515
  556
  600
  646
  695
Depreciation, amort., depletion, $m
  19
  27
  27
  28
  28
  28
  28
  28
  28
  29
  29
  5
  5
  6
  6
  6
  7
  7
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  13
Funds from operations, $m
  -15
  61
  65
  70
  76
  83
  91
  100
  110
  121
  133
  140
  155
  171
  188
  207
  227
  248
  272
  297
  323
  352
  382
  415
  449
  486
  525
  567
  611
  658
  708
Change in working capital, $m
  -40
  4
  4
  4
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
Cash from operations, $m
  25
  58
  61
  66
  71
  78
  85
  94
  103
  114
  126
  133
  147
  162
  179
  197
  217
  238
  260
  285
  311
  339
  368
  400
  434
  470
  508
  549
  592
  638
  687
Maintenance CAPEX, $m
  0
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
New CAPEX, $m
  -6
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
Cash from investing activities, $m
  -17
  -6
  -6
  -6
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -8
  -9
  -10
  -10
  -10
  -12
  -12
  -12
  -12
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -19
  -21
Free cash flow, $m
  8
  53
  56
  60
  65
  72
  79
  87
  96
  107
  118
  124
  138
  153
  169
  187
  206
  227
  249
  273
  298
  325
  354
  385
  418
  454
  491
  531
  573
  618
  666
Issuance/(repayment) of debt, $m
  20
  7
  8
  9
  9
  10
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  24
  25
  26
  28
  29
  31
  32
  34
  36
  37
  39
  41
Issuance/(repurchase) of shares, $m
  -41
  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  
  -19
  7
  8
  9
  9
  10
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  24
  25
  26
  28
  29
  31
  32
  34
  36
  37
  39
  41
Total cash flow (excl. dividends), $m
  -13
  60
  64
  69
  75
  82
  90
  99
  109
  120
  132
  139
  154
  170
  187
  206
  226
  248
  271
  296
  323
  351
  382
  414
  449
  486
  525
  566
  611
  658
  708
Retained Cash Flow (-), $m
  12
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -29
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -45
  -47
  -49
  -52
  -54
  -57
Prev. year cash balance distribution, $m
 
  50
  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
 
  100
  53
  57
  62
  68
  75
  82
  91
  101
  113
  118
  132
  147
  162
  180
  198
  219
  240
  263
  288
  315
  344
  374
  406
  441
  478
  517
  559
  603
  650
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
 
  96
  48
  49
  51
  52
  54
  56
  57
  58
  59
  56
  56
  56
  55
  53
  50
  48
  44
  41
  37
  33
  29
  25
  21
  17
  14
  11
  9
  7
  5
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
  100.0
  100.0
  100.0
  100.0

Federal Signal Corporation designs and manufactures a suite of products and integrated solutions for municipal, governmental, industrial, and commercial customers primarily in the United States, Europe, and Canada. It operates in two segments, Environmental Solutions Group and Safety and Security Systems Group. The Environmental Solutions Group segment manufactures and supplies a range of street sweeper vehicles, sewer cleaner and vacuum loader trucks, hydro-excavation trucks, and water blasting equipment under the Elgin, Vactor, Guzzler, and Jetstream brand names. This segment also engages in the sale of parts, service and repair, equipment rentals, and training under the FS Solutions brand. The Safety and Security Systems Group segment provides systems and products for campus and community alerting, emergency vehicles, first responder interoperable communications, and industrial communications, as well as command and municipal networked security. This segment sells its products primarily under the Federal Signal, Federal Signal VAMA, and Victor brand names. The company sells its products through dealers, direct sales, and wholesalers and distributors, as well as independent foreign distributors. Federal Signal Corporation was founded in 1901 and is headquartered in Oak Brook, Illinois.

FINANCIAL RATIOS  of  Federal Signal (FSS)

Valuation Ratios
P/E Ratio 25.1
Price to Sales 1.6
Price to Book 2.8
Price to Tangible Book
Price to Cash Flow 44.2
Price to Free Cash Flow 58.1
Growth Rates
Sales Growth Rate -7.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -40%
Cap. Spend. - 3 Yr. Gr. Rate -12.9%
Financial Strength
Quick Ratio 51
Current Ratio 0
LT Debt to Equity 16%
Total Debt to Equity 16.2%
Interest Coverage 58
Management Effectiveness
Return On Assets 6.8%
Ret/ On Assets - 3 Yr. Avg. 8.9%
Return On Total Capital 9.7%
Ret/ On T. Cap. - 3 Yr. Avg. 13.1%
Return On Equity 11%
Return On Equity - 3 Yr. Avg. 15.1%
Asset Turnover 1.1
Profitability Ratios
Gross Margin 25.8%
Gross Margin - 3 Yr. Avg. 27.4%
EBITDA Margin 10.9%
EBITDA Margin - 3 Yr. Avg. 12.8%
Operating Margin 8.1%
Oper. Margin - 3 Yr. Avg. 11%
Pre-Tax Margin 8.1%
Pre-Tax Margin - 3 Yr. Avg. 10.6%
Net Profit Margin 6.2%
Net Profit Margin - 3 Yr. Avg. 7.6%
Effective Tax Rate 31.6%
Eff/ Tax Rate - 3 Yr. Avg. 31.1%
Payout Ratio 38.6%

FSS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FSS stock intrinsic value calculation we used $708 million for the last fiscal year's total revenue generated by Federal Signal. The default revenue input number comes from 2016 income statement of Federal Signal. 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 FSS stock valuation model: a) initial revenue growth rate of 2.9% 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 4.3%, whose default value for FSS is calculated based on our internal credit rating of Federal Signal, 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 Federal Signal.
    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 FSS stock the variable cost ratio is equal to 23.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $498 million in the base year in the intrinsic value calculation for FSS 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 Federal Signal.

Corporate tax rate of 27% is the nominal tax rate for Federal Signal. 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 FSS 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 FSS are equal to 7.5%.

Life of production assets of 15.1 years is the average useful life of capital assets used in Federal Signal 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 FSS is equal to 17.7%. 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 - $394 million for Federal Signal - 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 57.845 million for Federal Signal 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 Federal Signal at the current share price and the inputted number of shares is $1.1 billion.

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COMPANY NEWS

▶ Federal Signal tops Street 2Q forecasts   [Aug-08-17 11:42PM  Associated Press]
▶ ETFs with exposure to Federal Signal Corp. : July 3, 2017   [Jul-03-17 03:13PM  Capital Cube]
▶ New Strong Buy Stocks for June 28th   [Jun-28-17 10:34AM  Zacks]
▶ [$$] GenNx360 Selling Maker of Dump Truck Bodies for $270 Million   [May-08-17 02:40PM  The Wall Street Journal]
▶ Federal Signal beats 1Q profit forecasts   [Apr-27-17 08:54AM  Associated Press]
▶ Federal Signal meets 4Q profit forecasts   [08:51AM  Associated Press]
Stock chart of FSS Financial statements of FSS
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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