Intrinsic value of Mercer International - MERC

Previous Close

$10.95

  Intrinsic Value

$7.69

stock screener

  Rating & Target

sell

-30%

  Value-price divergence*

+309%

Previous close

$10.95

 
Intrinsic value

$7.69

 
Up/down potential

-30%

 
Rating

sell

 
Value-price divergence*

+309%

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

We calculate the intrinsic value of MERC 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 0.7

 

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, %
  -9.78
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  932
  951
  973
  997
  1,026
  1,057
  1,091
  1,128
  1,168
  1,211
  1,258
  1,308
  1,361
  1,417
  1,477
  1,541
  1,609
  1,680
  1,756
  1,836
  1,920
  2,009
  2,103
  2,202
  2,306
  2,416
  2,531
  2,653
  2,781
  2,916
  3,057
Variable operating expenses, $m
 
  471
  481
  494
  508
  523
  540
  558
  578
  600
  623
  647
  674
  702
  731
  763
  796
  832
  869
  909
  950
  994
  1,041
  1,090
  1,141
  1,196
  1,253
  1,313
  1,377
  1,443
  1,513
Fixed operating expenses, $m
 
  375
  385
  394
  404
  414
  424
  435
  446
  457
  469
  480
  492
  505
  517
  530
  543
  557
  571
  585
  600
  615
  630
  646
  662
  679
  696
  713
  731
  749
  768
Total operating expenses, $m
  818
  846
  866
  888
  912
  937
  964
  993
  1,024
  1,057
  1,092
  1,127
  1,166
  1,207
  1,248
  1,293
  1,339
  1,389
  1,440
  1,494
  1,550
  1,609
  1,671
  1,736
  1,803
  1,875
  1,949
  2,026
  2,108
  2,192
  2,281
Operating income, $m
  114
  105
  107
  110
  114
  120
  126
  135
  144
  155
  167
  180
  195
  211
  229
  248
  269
  292
  316
  342
  370
  400
  432
  466
  502
  541
  583
  627
  674
  723
  776
EBITDA, $m
  186
  179
  182
  187
  193
  201
  211
  222
  235
  249
  264
  282
  300
  321
  343
  368
  394
  422
  452
  484
  519
  555
  595
  637
  681
  729
  779
  832
  889
  949
  1,013
Interest expense (income), $m
  50
  50
  51
  52
  54
  56
  58
  60
  62
  65
  68
  71
  74
  77
  81
  85
  89
  93
  98
  103
  108
  113
  119
  125
  131
  138
  145
  153
  160
  169
  177
Earnings before tax, $m
  59
  55
  56
  57
  60
  64
  69
  75
  82
  90
  99
  110
  121
  134
  148
  163
  180
  198
  218
  239
  262
  287
  313
  341
  371
  403
  438
  474
  513
  555
  599
Tax expense, $m
  24
  15
  15
  16
  16
  17
  19
  20
  22
  24
  27
  30
  33
  36
  40
  44
  49
  54
  59
  65
  71
  77
  84
  92
  100
  109
  118
  128
  139
  150
  162
Net income, $m
  35
  40
  41
  42
  44
  47
  50
  55
  60
  66
  72
  80
  88
  98
  108
  119
  132
  145
  159
  175
  191
  209
  228
  249
  271
  294
  319
  346
  375
  405
  437

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  137
  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
  1,159
  1,042
  1,066
  1,094
  1,125
  1,159
  1,196
  1,237
  1,281
  1,328
  1,379
  1,434
  1,492
  1,554
  1,620
  1,690
  1,764
  1,842
  1,925
  2,013
  2,105
  2,203
  2,306
  2,414
  2,528
  2,649
  2,775
  2,909
  3,049
  3,197
  3,352
Adjusted assets (=assets-cash), $m
  1,022
  1,042
  1,066
  1,094
  1,125
  1,159
  1,196
  1,237
  1,281
  1,328
  1,379
  1,434
  1,492
  1,554
  1,620
  1,690
  1,764
  1,842
  1,925
  2,013
  2,105
  2,203
  2,306
  2,414
  2,528
  2,649
  2,775
  2,909
  3,049
  3,197
  3,352
Revenue / Adjusted assets
  0.912
  0.913
  0.913
  0.911
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
  0.912
Average production assets, $m
  759
  774
  792
  812
  835
  860
  888
  918
  951
  986
  1,024
  1,064
  1,108
  1,154
  1,203
  1,254
  1,309
  1,368
  1,429
  1,494
  1,563
  1,635
  1,712
  1,792
  1,877
  1,966
  2,060
  2,159
  2,264
  2,373
  2,489
Working capital, $m
  309
  176
  180
  185
  190
  195
  202
  209
  216
  224
  233
  242
  252
  262
  273
  285
  298
  311
  325
  340
  355
  372
  389
  407
  427
  447
  468
  491
  514
  539
  566
Total debt, $m
  644
  659
  678
  699
  722
  748
  777
  808
  841
  878
  916
  958
  1,002
  1,050
  1,100
  1,153
  1,210
  1,270
  1,333
  1,400
  1,470
  1,545
  1,623
  1,706
  1,793
  1,885
  1,982
  2,083
  2,191
  2,303
  2,422
Total liabilities, $m
  780
  795
  814
  835
  858
  884
  913
  944
  977
  1,014
  1,052
  1,094
  1,138
  1,186
  1,236
  1,289
  1,346
  1,406
  1,469
  1,536
  1,606
  1,681
  1,759
  1,842
  1,929
  2,021
  2,118
  2,219
  2,327
  2,439
  2,558
Total equity, $m
  379
  247
  253
  259
  267
  275
  283
  293
  304
  315
  327
  340
  354
  368
  384
  400
  418
  437
  456
  477
  499
  522
  546
  572
  599
  628
  658
  689
  723
  758
  794
Total liabilities and equity, $m
  1,159
  1,042
  1,067
  1,094
  1,125
  1,159
  1,196
  1,237
  1,281
  1,329
  1,379
  1,434
  1,492
  1,554
  1,620
  1,689
  1,764
  1,843
  1,925
  2,013
  2,105
  2,203
  2,305
  2,414
  2,528
  2,649
  2,776
  2,908
  3,050
  3,197
  3,352
Debt-to-equity ratio
  1.699
  2.670
  2.680
  2.690
  2.710
  2.720
  2.740
  2.760
  2.770
  2.790
  2.800
  2.820
  2.830
  2.850
  2.870
  2.880
  2.890
  2.910
  2.920
  2.930
  2.950
  2.960
  2.970
  2.980
  2.990
  3.000
  3.010
  3.020
  3.030
  3.040
  3.050
Adjusted equity ratio
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237
  0.237

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  35
  40
  41
  42
  44
  47
  50
  55
  60
  66
  72
  80
  88
  98
  108
  119
  132
  145
  159
  175
  191
  209
  228
  249
  271
  294
  319
  346
  375
  405
  437
Depreciation, amort., depletion, $m
  72
  74
  75
  77
  80
  82
  85
  87
  91
  94
  98
  101
  105
  110
  115
  119
  125
  130
  136
  142
  149
  156
  163
  171
  179
  187
  196
  206
  216
  226
  237
Funds from operations, $m
  151
  114
  116
  119
  123
  129
  135
  142
  150
  160
  170
  181
  194
  208
  223
  239
  256
  275
  295
  317
  340
  365
  391
  420
  450
  482
  516
  552
  590
  631
  674
Change in working capital, $m
  10
  3
  4
  5
  5
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
Cash from operations, $m
  141
  111
  112
  115
  118
  123
  128
  135
  143
  152
  161
  172
  184
  197
  212
  227
  244
  262
  281
  302
  325
  348
  374
  401
  430
  461
  494
  529
  567
  606
  648
Maintenance CAPEX, $m
  0
  -72
  -74
  -75
  -77
  -80
  -82
  -85
  -87
  -91
  -94
  -98
  -101
  -105
  -110
  -115
  -119
  -125
  -130
  -136
  -142
  -149
  -156
  -163
  -171
  -179
  -187
  -196
  -206
  -216
  -226
New CAPEX, $m
  -44
  -15
  -18
  -20
  -23
  -25
  -28
  -30
  -33
  -35
  -38
  -40
  -43
  -46
  -49
  -52
  -55
  -58
  -62
  -65
  -69
  -72
  -76
  -81
  -85
  -89
  -94
  -99
  -104
  -110
  -115
Cash from investing activities, $m
  -44
  -87
  -92
  -95
  -100
  -105
  -110
  -115
  -120
  -126
  -132
  -138
  -144
  -151
  -159
  -167
  -174
  -183
  -192
  -201
  -211
  -221
  -232
  -244
  -256
  -268
  -281
  -295
  -310
  -326
  -341
Free cash flow, $m
  97
  23
  21
  19
  18
  18
  19
  20
  23
  26
  30
  34
  40
  46
  53
  61
  69
  79
  89
  101
  114
  127
  142
  158
  175
  193
  213
  234
  257
  281
  307
Issuance/(repayment) of debt, $m
  -34
  15
  18
  21
  23
  26
  29
  31
  34
  36
  39
  42
  44
  47
  50
  53
  56
  60
  63
  67
  71
  74
  79
  83
  87
  92
  97
  102
  107
  113
  119
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  
  -32
  15
  18
  21
  23
  26
  29
  31
  34
  36
  39
  42
  44
  47
  50
  53
  56
  60
  63
  67
  71
  74
  79
  83
  87
  92
  97
  102
  107
  113
  119
Total cash flow (excl. dividends), $m
  62
  38
  39
  40
  42
  44
  47
  51
  56
  62
  68
  76
  84
  93
  103
  114
  126
  139
  153
  168
  184
  202
  220
  241
  262
  285
  310
  336
  364
  394
  425
Retained Cash Flow (-), $m
  4
  -5
  -6
  -6
  -7
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -37
Prev. year cash balance distribution, $m
 
  137
  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
 
  170
  33
  33
  34
  36
  38
  42
  46
  51
  56
  63
  70
  78
  87
  97
  108
  120
  133
  147
  162
  178
  196
  215
  235
  257
  280
  304
  331
  359
  388
Discount rate, %
 
  7.50
  7.88
  8.27
  8.68
  9.12
  9.57
  10.05
  10.55
  11.08
  11.63
  12.22
  12.83
  13.47
  14.14
  14.85
  15.59
  16.37
  17.19
  18.05
  18.95
  19.90
  20.89
  21.94
  23.04
  24.19
  25.40
  26.67
  28.00
  29.40
  30.87
PV of cash for distribution, $m
 
  158
  29
  26
  25
  23
  22
  21
  21
  20
  19
  18
  16
  15
  14
  12
  11
  9
  8
  6
  5
  4
  3
  2
  2
  1
  1
  1
  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
  100.0
  100.0
  100.0
  100.0

Mercer International Inc., together with its subsidiaries, manufactures and sells northern bleached softwood Kraft (NBSK) pulp worldwide. It produces NBSK pulp principally from wood chips and pulp logs; and tall oil for use as a chemical additive and green energy source, as well as carbon neutral or green energy using carbon-neutral bio-fuels, such as black liquor and wood waste. The company sells its pulp to tissue, specialty papers, and printing and writing paper manufacturers; and green energy to third party utilities. Mercer International Inc. was founded in 1968 and is headquartered in Vancouver, Canada.

FINANCIAL RATIOS  of  Mercer International (MERC)

Valuation Ratios
P/E Ratio 20.2
Price to Sales 0.8
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 5
Price to Free Cash Flow 7.3
Growth Rates
Sales Growth Rate -9.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -12%
Cap. Spend. - 3 Yr. Gr. Rate -0.9%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 169.9%
Total Debt to Equity 169.9%
Interest Coverage 2
Management Effectiveness
Return On Assets 5.5%
Ret/ On Assets - 3 Yr. Avg. 9.3%
Return On Total Capital 3.4%
Ret/ On T. Cap. - 3 Yr. Avg. 6.5%
Return On Equity 9.2%
Return On Equity - 3 Yr. Avg. 18.7%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 17%
Gross Margin - 3 Yr. Avg. 18.4%
EBITDA Margin 19.4%
EBITDA Margin - 3 Yr. Avg. 20.7%
Operating Margin 12.2%
Oper. Margin - 3 Yr. Avg. 14.1%
Pre-Tax Margin 6.3%
Pre-Tax Margin - 3 Yr. Avg. 8.4%
Net Profit Margin 3.8%
Net Profit Margin - 3 Yr. Avg. 6.9%
Effective Tax Rate 40.7%
Eff/ Tax Rate - 3 Yr. Avg. 17.3%
Payout Ratio 85.7%

MERC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MERC stock intrinsic value calculation we used $932 million for the last fiscal year's total revenue generated by Mercer International. The default revenue input number comes from 2016 income statement of Mercer International. 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 MERC stock valuation model: a) initial revenue growth rate of 2% 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 7.5%, whose default value for MERC is calculated based on our internal credit rating of Mercer International, 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 Mercer International.
    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 MERC stock the variable cost ratio is equal to 49.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $366 million in the base year in the intrinsic value calculation for MERC 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 7.7% for Mercer International.

Corporate tax rate of 27% is the nominal tax rate for Mercer International. 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 MERC 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 MERC are equal to 81.4%.

Life of production assets of 10.5 years is the average useful life of capital assets used in Mercer International 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 MERC is equal to 18.5%. 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 - $379 million for Mercer International - 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 63.899 million for Mercer International 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 Mercer International at the current share price and the inputted number of shares is $0.7 billion.

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COMPANY NEWS

▶ Mercer International reports 2Q loss   [Jul-28-17 08:04PM  Associated Press]
▶ Mercer International posts 1Q profit   [Apr-27-17 06:04PM  Associated Press]
▶ Peter Kellogg Invests in Mercer International   [Apr-18-17 01:54PM  GuruFocus.com]
▶ Mercer International posts 4Q profit   [Feb-09-17 07:31PM  Associated Press]
▶ Do Hedge Funds Love Mercer International Inc. (MERC)?   [Dec-10-16 12:57PM  at Insider Monkey]
▶ Gates Capital Loves Material Stocks, Especially These Five   [Oct-03-16 09:33AM  at Insider Monkey]
▶ Mercer International Trades Ex-Dividend Thursday (MERC)   [Jun-23-16 11:35AM  at Investopedia]
Stock chart of MERC Financial statements of MERC
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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