Intrinsic value of KMG Chemicals - KMG

Previous Close

$48.42

  Intrinsic Value

$6.15

stock screener

  Rating & Target

str. sell

-87%

  Value-price divergence*

+220%

Previous close

$48.42

 
Intrinsic value

$6.15

 
Up/down potential

-87%

 
Rating

str. sell

 
Value-price divergence*

+220%

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

We calculate the intrinsic value of KMG 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 0.6

 

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, %
  -7.17
  11.30
  10.67
  10.10
  9.59
  9.13
  8.72
  8.35
  8.01
  7.71
  7.44
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
  5.33
  5.30
Revenue, $m
  298
  332
  367
  404
  443
  483
  526
  569
  615
  662
  712
  763
  816
  872
  929
  989
  1,051
  1,116
  1,184
  1,254
  1,327
  1,404
  1,484
  1,567
  1,654
  1,745
  1,840
  1,940
  2,044
  2,153
  2,267
Variable operating expenses, $m
 
  308
  341
  375
  411
  448
  487
  528
  570
  613
  659
  704
  753
  804
  857
  912
  970
  1,030
  1,092
  1,157
  1,225
  1,295
  1,369
  1,446
  1,526
  1,610
  1,698
  1,790
  1,886
  1,986
  2,091
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
  269
  308
  341
  375
  411
  448
  487
  528
  570
  613
  659
  704
  753
  804
  857
  912
  970
  1,030
  1,092
  1,157
  1,225
  1,295
  1,369
  1,446
  1,526
  1,610
  1,698
  1,790
  1,886
  1,986
  2,091
Operating income, $m
  29
  23
  26
  29
  32
  35
  38
  42
  45
  49
  53
  59
  63
  67
  72
  77
  81
  86
  92
  97
  103
  109
  115
  121
  128
  135
  142
  150
  158
  167
  175
EBITDA, $m
  44
  39
  43
  47
  52
  56
  61
  66
  72
  77
  83
  89
  95
  101
  108
  115
  122
  130
  138
  146
  154
  163
  173
  182
  192
  203
  214
  226
  238
  250
  264
Interest expense (income), $m
  1
  1
  2
  2
  2
  3
  3
  4
  4
  5
  5
  6
  6
  7
  8
  8
  9
  10
  10
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  21
  22
Earnings before tax, $m
  28
  22
  25
  27
  30
  32
  35
  38
  41
  44
  48
  53
  57
  60
  64
  68
  72
  77
  81
  86
  91
  96
  101
  107
  113
  119
  125
  132
  139
  146
  154
Tax expense, $m
  9
  6
  7
  7
  8
  9
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  20
  21
  22
  23
  25
  26
  27
  29
  30
  32
  34
  36
  37
  39
  41
Net income, $m
  19
  16
  18
  20
  22
  24
  26
  28
  30
  32
  35
  39
  41
  44
  47
  50
  53
  56
  59
  63
  66
  70
  74
  78
  82
  87
  91
  96
  101
  107
  112

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  12
  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
  237
  251
  277
  305
  335
  365
  397
  430
  465
  500
  538
  576
  616
  658
  702
  747
  794
  843
  894
  947
  1,002
  1,060
  1,121
  1,184
  1,249
  1,318
  1,390
  1,465
  1,544
  1,626
  1,712
Adjusted assets (=assets-cash), $m
  225
  251
  277
  305
  335
  365
  397
  430
  465
  500
  538
  576
  616
  658
  702
  747
  794
  843
  894
  947
  1,002
  1,060
  1,121
  1,184
  1,249
  1,318
  1,390
  1,465
  1,544
  1,626
  1,712
Revenue / Adjusted assets
  1.324
  1.323
  1.325
  1.325
  1.322
  1.323
  1.325
  1.323
  1.323
  1.324
  1.323
  1.325
  1.325
  1.325
  1.323
  1.324
  1.324
  1.324
  1.324
  1.324
  1.324
  1.325
  1.324
  1.323
  1.324
  1.324
  1.324
  1.324
  1.324
  1.324
  1.324
Average production assets, $m
  116
  129
  143
  157
  172
  188
  204
  221
  239
  258
  277
  297
  317
  339
  361
  385
  409
  434
  460
  488
  516
  546
  577
  610
  643
  679
  716
  755
  795
  837
  882
Working capital, $m
  51
  43
  48
  53
  58
  63
  69
  75
  81
  87
  93
  100
  107
  114
  122
  130
  138
  146
  155
  164
  174
  184
  194
  205
  217
  229
  241
  254
  268
  282
  297
Total debt, $m
  36
  47
  58
  70
  82
  95
  108
  122
  136
  151
  167
  183
  200
  217
  235
  254
  274
  294
  316
  338
  361
  385
  410
  437
  464
  493
  523
  554
  587
  622
  658
Total liabilities, $m
  94
  105
  116
  128
  140
  153
  166
  180
  194
  209
  225
  241
  258
  275
  293
  312
  332
  352
  374
  396
  419
  443
  468
  495
  522
  551
  581
  612
  645
  680
  716
Total equity, $m
  143
  146
  161
  178
  195
  212
  231
  250
  270
  291
  313
  335
  359
  383
  408
  435
  462
  491
  520
  551
  583
  617
  652
  689
  727
  767
  809
  853
  898
  946
  996
Total liabilities and equity, $m
  237
  251
  277
  306
  335
  365
  397
  430
  464
  500
  538
  576
  617
  658
  701
  747
  794
  843
  894
  947
  1,002
  1,060
  1,120
  1,184
  1,249
  1,318
  1,390
  1,465
  1,543
  1,626
  1,712
Debt-to-equity ratio
  0.252
  0.320
  0.360
  0.390
  0.420
  0.450
  0.470
  0.490
  0.500
  0.520
  0.530
  0.550
  0.560
  0.570
  0.580
  0.580
  0.590
  0.600
  0.610
  0.610
  0.620
  0.620
  0.630
  0.630
  0.640
  0.640
  0.650
  0.650
  0.650
  0.660
  0.660
Adjusted equity ratio
  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
  0.582

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  19
  16
  18
  20
  22
  24
  26
  28
  30
  32
  35
  39
  41
  44
  47
  50
  53
  56
  59
  63
  66
  70
  74
  78
  82
  87
  91
  96
  101
  107
  112
Depreciation, amort., depletion, $m
  15
  15
  16
  18
  19
  21
  23
  24
  26
  28
  30
  30
  32
  34
  36
  38
  41
  43
  46
  49
  52
  55
  58
  61
  64
  68
  72
  75
  80
  84
  88
Funds from operations, $m
  45
  31
  34
  38
  41
  45
  48
  52
  56
  60
  65
  69
  73
  78
  83
  88
  94
  99
  105
  112
  118
  125
  132
  139
  147
  155
  163
  172
  181
  190
  200
Change in working capital, $m
  4
  4
  5
  5
  5
  5
  6
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
Cash from operations, $m
  41
  27
  30
  33
  36
  39
  43
  46
  50
  54
  58
  62
  66
  71
  76
  80
  86
  91
  97
  102
  108
  115
  121
  128
  135
  143
  150
  159
  167
  176
  185
Maintenance CAPEX, $m
  0
  -12
  -13
  -14
  -16
  -17
  -19
  -20
  -22
  -24
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -41
  -43
  -46
  -49
  -52
  -55
  -58
  -61
  -64
  -68
  -72
  -75
  -80
  -84
New CAPEX, $m
  -14
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -32
  -34
  -35
  -37
  -39
  -40
  -42
  -44
Cash from investing activities, $m
  -17
  -25
  -27
  -28
  -31
  -33
  -35
  -37
  -40
  -42
  -45
  -48
  -51
  -54
  -56
  -59
  -62
  -66
  -69
  -73
  -78
  -82
  -86
  -90
  -95
  -99
  -105
  -111
  -115
  -122
  -128
Free cash flow, $m
  24
  2
  3
  4
  5
  6
  8
  9
  10
  12
  13
  14
  16
  18
  19
  21
  23
  25
  27
  29
  31
  33
  36
  38
  40
  43
  46
  48
  51
  54
  57
Issuance/(repayment) of debt, $m
  -17
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  17
  18
  19
  20
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
  33
  34
  36
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  
  -18
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  17
  18
  19
  20
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
  33
  34
  36
Total cash flow (excl. dividends), $m
  6
  13
  14
  16
  17
  19
  21
  23
  25
  27
  29
  30
  33
  35
  37
  40
  43
  45
  48
  51
  54
  57
  61
  64
  68
  72
  76
  80
  84
  89
  93
Retained Cash Flow (-), $m
  -20
  -15
  -16
  -16
  -17
  -18
  -19
  -19
  -20
  -21
  -22
  -23
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -42
  -44
  -46
  -48
  -50
Prev. year cash balance distribution, $m
 
  12
  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
 
  10
  -1
  0
  0
  1
  2
  3
  5
  6
  7
  8
  9
  11
  12
  14
  15
  17
  18
  20
  22
  24
  26
  28
  30
  32
  34
  36
  38
  41
  43
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
 
  10
  -1
  0
  0
  1
  2
  2
  3
  3
  4
  4
  4
  4
  4
  4
  4
  4
  3
  3
  3
  2
  2
  2
  2
  1
  1
  1
  1
  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
  100.0
  100.0
  100.0
  100.0

KMG Chemicals, Inc., through its subsidiaries, manufactures, formulates, and distributes specialty chemicals worldwide. The company’s Electronic Chemicals segment is involved in the sale of high purity and ultra purity wet process chemicals primarily to clean and etch silicon wafers in the production of semiconductors. This segment’s products include sulfuric, phosphoric, and nitric and hydrofluoric acids; ammonium hydroxide; hydrogen peroxide; isopropyl alcohol; other specialty organic solvents; and various blends of chemicals. Its Other Chemicals segment engages in the supply of penta products consisting of solid blocks and concentrated solutions to industrial customers who use these preservatives to pressure treat wood products, primarily for utility poles and cross-arms, to extend their life by protecting against insect damage and decay, as well as sale of hydrochloric acid, which is a byproduct of penta production for use in the steel and oil well service industries. This segment is also involved in the manufacture and distribution of industrial sealants, lubricants, and related equipment primarily to the oil and gas storage, pipeline, and gas distribution markets. KMG Chemicals, Inc. was founded in 1985 and is headquartered in Houston, Texas.

FINANCIAL RATIOS  of  KMG Chemicals (KMG)

Valuation Ratios
P/E Ratio 30.3
Price to Sales 1.9
Price to Book 4
Price to Tangible Book
Price to Cash Flow 14
Price to Free Cash Flow 21.3
Growth Rates
Sales Growth Rate -7.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate 18.5%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 25.2%
Total Debt to Equity 25.2%
Interest Coverage 29
Management Effectiveness
Return On Assets 8.2%
Ret/ On Assets - 3 Yr. Avg. 4.7%
Return On Total Capital 10.7%
Ret/ On T. Cap. - 3 Yr. Avg. 5.6%
Return On Equity 14.3%
Return On Equity - 3 Yr. Avg. 7.8%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 38.9%
Gross Margin - 3 Yr. Avg. 34.1%
EBITDA Margin 14.8%
EBITDA Margin - 3 Yr. Avg. 10.1%
Operating Margin 9.7%
Oper. Margin - 3 Yr. Avg. 6%
Pre-Tax Margin 9.4%
Pre-Tax Margin - 3 Yr. Avg. 5.1%
Net Profit Margin 6.4%
Net Profit Margin - 3 Yr. Avg. 3.3%
Effective Tax Rate 32.1%
Eff/ Tax Rate - 3 Yr. Avg. 23%
Payout Ratio 5.3%

KMG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KMG stock intrinsic value calculation we used $298 million for the last fiscal year's total revenue generated by KMG Chemicals. The default revenue input number comes from 2016 income statement of KMG Chemicals. 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 KMG stock valuation model: a) initial revenue growth rate of 11.3% 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 KMG is calculated based on our internal credit rating of KMG Chemicals, 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 KMG Chemicals.
    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 KMG stock the variable cost ratio is equal to 93%.

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 KMG 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 KMG Chemicals.

Corporate tax rate of 27% is the nominal tax rate for KMG Chemicals. 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 KMG 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 KMG are equal to 38.9%.

Life of production assets of 10 years is the average useful life of capital assets used in KMG Chemicals 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 KMG is equal to 13.1%. 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 - $143 million for KMG Chemicals - 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 11.891 million for KMG Chemicals 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 KMG Chemicals at the current share price and the inputted number of shares is $0.6 billion.

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COMPANY NEWS

▶ ETFs with exposure to KMG Chemicals, Inc. : July 5, 2017   [Jul-05-17 12:52PM  Capital Cube]
▶ KMG Completes Acquisition of Flowchem LLC   [02:00PM  GlobeNewswire]
▶ KMG posts 3Q profit   [Jun-09-17 07:46AM  Associated Press]
▶ Bet On 4 Profitable Stocks for Impressive Gains   [Jun-07-17 06:32AM  Zacks]
▶ 4 Profitable Stocks to Buy for Stunning Returns   [May-05-17 09:53AM  Zacks]
▶ Fort Worth co. buys Houston-area pipeline products co. for $495M   [Apr-25-17 01:15PM  American City Business Journals]
▶ KMG Chemicals to buy Flowchem for $495 million   [Apr-24-17 06:21PM  MarketWatch]
▶ KMG to Acquire Flowchem LLC   [05:45PM  GlobeNewswire]
▶ KMG Declares Quarterly Dividend   [Mar-02-17 04:15PM  GlobeNewswire]
▶ KMG Schedules Fiscal Second Quarter 2017 Results Call   [Feb-22-17 05:00PM  GlobeNewswire]
▶ KMG Announces Acquisition of Sealweld   [Jan-31-17 04:30PM  Business Wire]
▶ Is Hometrust Bancshares Inc (HTBI) a Good Stock to Buy?   [Dec-12-16 06:09PM  at Insider Monkey]
Stock chart of KMG Financial statements of KMG
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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