Intrinsic value of Federal Signal - FSS

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$16.83

  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 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 1.0

 

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
  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
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
Revenue, $m
  708
  798
  830
  864
  900
  939
  980
  1,023
  1,069
  1,117
  1,168
  1,222
  1,279
  1,339
  1,402
  1,469
  1,539
  1,613
  1,690
  1,772
  1,858
  1,948
  2,044
  2,144
  2,249
  2,359
  2,475
  2,597
  2,725
  2,860
  3,002
Variable operating expenses, $m
 
  705
  733
  762
  793
  826
  861
  898
  937
  978
  1,022
  1,045
  1,093
  1,145
  1,199
  1,255
  1,315
  1,379
  1,445
  1,515
  1,588
  1,666
  1,747
  1,832
  1,922
  2,016
  2,116
  2,220
  2,330
  2,445
  2,566
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
  651
  705
  733
  762
  793
  826
  861
  898
  937
  978
  1,022
  1,045
  1,093
  1,145
  1,199
  1,255
  1,315
  1,379
  1,445
  1,515
  1,588
  1,666
  1,747
  1,832
  1,922
  2,016
  2,116
  2,220
  2,330
  2,445
  2,566
Operating income, $m
  57
  93
  97
  102
  108
  113
  119
  125
  132
  139
  146
  177
  186
  194
  204
  213
  223
  234
  245
  257
  270
  283
  297
  311
  327
  343
  359
  377
  396
  415
  436
EBITDA, $m
  76
  118
  123
  128
  133
  139
  145
  151
  158
  165
  173
  181
  189
  198
  208
  218
  228
  239
  250
  262
  275
  289
  303
  317
  333
  349
  367
  385
  404
  424
  445
Interest expense (income), $m
  1
  2
  2
  3
  3
  4
  4
  5
  6
  6
  7
  8
  9
  9
  10
  11
  12
  13
  14
  15
  17
  18
  19
  21
  22
  24
  25
  27
  29
  31
  33
Earnings before tax, $m
  57
  91
  95
  99
  104
  109
  115
  120
  126
  133
  139
  170
  177
  185
  193
  202
  211
  221
  231
  242
  253
  265
  278
  291
  304
  319
  334
  350
  367
  385
  403
Tax expense, $m
  18
  25
  26
  27
  28
  30
  31
  32
  34
  36
  38
  46
  48
  50
  52
  55
  57
  60
  62
  65
  68
  72
  75
  78
  82
  86
  90
  95
  99
  104
  109
Net income, $m
  44
  66
  69
  73
  76
  80
  84
  88
  92
  97
  102
  124
  129
  135
  141
  148
  154
  161
  169
  177
  185
  194
  203
  212
  222
  233
  244
  256
  268
  281
  294

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
  614
  639
  665
  693
  723
  754
  787
  823
  860
  899
  941
  985
  1,031
  1,079
  1,131
  1,185
  1,241
  1,301
  1,364
  1,430
  1,500
  1,573
  1,650
  1,731
  1,816
  1,905
  1,999
  2,098
  2,202
  2,311
Adjusted assets (=assets-cash), $m
  592
  614
  639
  665
  693
  723
  754
  787
  823
  860
  899
  941
  985
  1,031
  1,079
  1,131
  1,185
  1,241
  1,301
  1,364
  1,430
  1,500
  1,573
  1,650
  1,731
  1,816
  1,905
  1,999
  2,098
  2,202
  2,311
Revenue / Adjusted assets
  1.196
  1.300
  1.299
  1.299
  1.299
  1.299
  1.300
  1.300
  1.299
  1.299
  1.299
  1.299
  1.298
  1.299
  1.299
  1.299
  1.299
  1.300
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
  1.299
Average production assets, $m
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  81
  84
  88
  92
  97
  101
  106
  111
  117
  122
  128
  134
  141
  148
  155
  163
  171
  179
  188
  197
  207
Working capital, $m
  175
  127
  132
  137
  143
  149
  156
  163
  170
  178
  186
  194
  203
  213
  223
  234
  245
  256
  269
  282
  295
  310
  325
  341
  358
  375
  394
  413
  433
  455
  477
Total debt, $m
  64
  55
  65
  77
  89
  102
  116
  131
  147
  163
  180
  199
  218
  239
  260
  283
  307
  332
  358
  386
  415
  446
  478
  512
  548
  586
  625
  667
  710
  756
  804
Total liabilities, $m
  249
  272
  282
  294
  306
  319
  333
  348
  364
  380
  397
  416
  435
  456
  477
  500
  524
  549
  575
  603
  632
  663
  695
  729
  765
  803
  842
  884
  927
  973
  1,021
Total equity, $m
  394
  343
  357
  371
  387
  403
  421
  439
  459
  480
  502
  525
  549
  575
  602
  631
  661
  693
  726
  761
  798
  837
  878
  921
  966
  1,013
  1,063
  1,116
  1,171
  1,229
  1,289
Total liabilities and equity, $m
  643
  615
  639
  665
  693
  722
  754
  787
  823
  860
  899
  941
  984
  1,031
  1,079
  1,131
  1,185
  1,242
  1,301
  1,364
  1,430
  1,500
  1,573
  1,650
  1,731
  1,816
  1,905
  2,000
  2,098
  2,202
  2,310
Debt-to-equity ratio
  0.162
  0.160
  0.180
  0.210
  0.230
  0.250
  0.280
  0.300
  0.320
  0.340
  0.360
  0.380
  0.400
  0.410
  0.430
  0.450
  0.460
  0.480
  0.490
  0.510
  0.520
  0.530
  0.540
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
  0.620
  0.620
Adjusted equity ratio
  0.579
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558
  0.558

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  44
  66
  69
  73
  76
  80
  84
  88
  92
  97
  102
  124
  129
  135
  141
  148
  154
  161
  169
  177
  185
  194
  203
  212
  222
  233
  244
  256
  268
  281
  294
Depreciation, amort., depletion, $m
  19
  26
  26
  26
  26
  26
  26
  26
  26
  26
  27
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  9
Funds from operations, $m
  -15
  92
  95
  98
  102
  106
  110
  114
  119
  123
  128
  127
  133
  139
  145
  152
  159
  166
  174
  182
  190
  199
  209
  218
  229
  240
  251
  263
  276
  289
  303
Change in working capital, $m
  -40
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  18
  19
  20
  21
  23
Cash from operations, $m
  25
  87
  90
  93
  96
  100
  103
  107
  111
  116
  120
  119
  124
  129
  135
  141
  148
  154
  161
  169
  177
  185
  193
  202
  212
  222
  233
  244
  255
  268
  281
Maintenance CAPEX, $m
  0
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
New CAPEX, $m
  -6
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
Cash from investing activities, $m
  -17
  -4
  -4
  -4
  -5
  -6
  -6
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -11
  -11
  -11
  -13
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
Free cash flow, $m
  8
  83
  85
  88
  91
  94
  98
  101
  105
  109
  113
  112
  117
  122
  127
  133
  138
  145
  151
  158
  165
  173
  181
  190
  199
  208
  218
  228
  239
  251
  263
Issuance/(repayment) of debt, $m
  20
  11
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  20
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  48
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
  11
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  20
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  48
Total cash flow (excl. dividends), $m
  -13
  93
  96
  100
  103
  107
  112
  116
  121
  126
  131
  130
  136
  142
  148
  155
  162
  170
  178
  186
  195
  204
  214
  224
  234
  246
  257
  270
  283
  296
  311
Retained Cash Flow (-), $m
  12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -55
  -58
  -61
Prev. year cash balance distribution, $m
 
  76
  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
 
  156
  82
  85
  88
  91
  94
  97
  101
  105
  109
  107
  111
  116
  121
  127
  132
  138
  144
  151
  158
  165
  173
  181
  189
  198
  207
  217
  228
  239
  250
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
 
  150
  75
  74
  72
  70
  68
  66
  63
  60
  57
  51
  48
  44
  41
  37
  34
  30
  27
  23
  20
  17
  14
  12
  10
  8
  6
  5
  4
  3
  2
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 22.8
Price to Sales 1.4
Price to Book 2.5
Price to Tangible Book
Price to Cash Flow 40.1
Price to Free Cash Flow 52.8
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 $768 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 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 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 88.5%.

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 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 4.3% 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 6.9%.

Life of production assets of 23.9 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 15.9%. 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 - $406 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 $1.0 billion.


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COMPANY NEWS

▶ [$$] 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 Annual reports 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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