Intrinsic value of Tessco Technologies - TESS

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$14.00

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$14.00

 
Intrinsic value

$2.85

 
Up/down potential

-80%

 
Rating

str. sell

 
Value-price divergence* premium content

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

We calculate the intrinsic value of TESS 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 2017), $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 0.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  0.38
  7.90
  7.61
  7.35
  7.11
  6.90
  6.71
  6.54
  6.39
  6.25
  6.12
  6.01
  5.91
  5.82
  5.74
  5.66
  5.60
  5.54
  5.48
  5.44
  5.39
  5.35
  5.32
  5.29
  5.26
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
Revenue, $m
  533
  575
  619
  664
  712
  761
  812
  865
  920
  978
  1,038
  1,100
  1,165
  1,233
  1,303
  1,377
  1,454
  1,535
  1,619
  1,707
  1,799
  1,895
  1,996
  2,102
  2,212
  2,328
  2,449
  2,576
  2,709
  2,849
  2,995
Variable operating expenses, $m
 
  565
  608
  653
  699
  747
  797
  849
  904
  960
  1,019
  1,079
  1,142
  1,209
  1,278
  1,351
  1,426
  1,505
  1,588
  1,674
  1,764
  1,859
  1,958
  2,061
  2,169
  2,283
  2,402
  2,526
  2,657
  2,794
  2,937
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
  531
  565
  608
  653
  699
  747
  797
  849
  904
  960
  1,019
  1,079
  1,142
  1,209
  1,278
  1,351
  1,426
  1,505
  1,588
  1,674
  1,764
  1,859
  1,958
  2,061
  2,169
  2,283
  2,402
  2,526
  2,657
  2,794
  2,937
Operating income, $m
  3
  10
  11
  12
  12
  13
  14
  15
  17
  18
  19
  21
  22
  24
  25
  27
  28
  30
  31
  33
  35
  36
  38
  40
  43
  45
  47
  50
  52
  55
  58
EBITDA, $m
  8
  13
  14
  15
  16
  18
  19
  20
  21
  23
  24
  25
  27
  28
  30
  32
  34
  35
  37
  39
  41
  44
  46
  48
  51
  54
  56
  59
  62
  66
  69
Interest expense (income), $m
  0
  0
  0
  0
  1
  1
  1
  1
  1
  2
  2
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
Earnings before tax, $m
  2
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  34
  36
  38
  39
  41
  43
  45
  48
Tax expense, $m
  1
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
Net income, $m
  1
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  32
  33
  35

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  9
  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
  174
  178
  192
  206
  220
  236
  251
  268
  285
  303
  321
  341
  361
  382
  404
  426
  450
  475
  501
  528
  557
  587
  618
  651
  685
  721
  758
  798
  839
  882
  927
Adjusted assets (=assets-cash), $m
  165
  178
  192
  206
  220
  236
  251
  268
  285
  303
  321
  341
  361
  382
  404
  426
  450
  475
  501
  528
  557
  587
  618
  651
  685
  721
  758
  798
  839
  882
  927
Revenue / Adjusted assets
  3.230
  3.230
  3.224
  3.223
  3.236
  3.225
  3.235
  3.228
  3.228
  3.228
  3.234
  3.226
  3.227
  3.228
  3.225
  3.232
  3.231
  3.232
  3.232
  3.233
  3.230
  3.228
  3.230
  3.229
  3.229
  3.229
  3.231
  3.228
  3.229
  3.230
  3.231
Average production assets, $m
  10
  11
  12
  13
  14
  14
  15
  16
  17
  19
  20
  21
  22
  23
  25
  26
  28
  29
  31
  32
  34
  36
  38
  40
  42
  44
  47
  49
  51
  54
  57
Working capital, $m
  77
  74
  79
  85
  91
  97
  104
  111
  118
  125
  133
  141
  149
  158
  167
  176
  186
  196
  207
  218
  230
  243
  255
  269
  283
  298
  313
  330
  347
  365
  383
Total debt, $m
  0
  5
  11
  16
  22
  28
  35
  41
  48
  55
  62
  70
  78
  87
  95
  105
  114
  124
  134
  145
  157
  169
  181
  194
  208
  222
  237
  253
  270
  287
  305
Total liabilities, $m
  66
  71
  77
  82
  88
  94
  101
  107
  114
  121
  128
  136
  144
  153
  161
  171
  180
  190
  200
  211
  223
  235
  247
  260
  274
  288
  303
  319
  336
  353
  371
Total equity, $m
  108
  107
  115
  123
  132
  141
  151
  161
  171
  182
  193
  204
  216
  229
  242
  256
  270
  285
  301
  317
  334
  352
  371
  390
  411
  432
  455
  479
  503
  529
  556
Total liabilities and equity, $m
  174
  178
  192
  205
  220
  235
  252
  268
  285
  303
  321
  340
  360
  382
  403
  427
  450
  475
  501
  528
  557
  587
  618
  650
  685
  720
  758
  798
  839
  882
  927
Debt-to-equity ratio
  0.000
  0.050
  0.090
  0.130
  0.170
  0.200
  0.230
  0.260
  0.280
  0.300
  0.320
  0.340
  0.360
  0.380
  0.390
  0.410
  0.420
  0.440
  0.450
  0.460
  0.470
  0.480
  0.490
  0.500
  0.510
  0.510
  0.520
  0.530
  0.540
  0.540
  0.550
Adjusted equity ratio
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600
  0.600

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  32
  33
  35
Depreciation, amort., depletion, $m
  5
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  4
  4
  5
  5
  5
  6
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
Funds from operations, $m
  29
  11
  11
  12
  13
  13
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  35
  36
  38
  40
  42
  44
  46
Change in working capital, $m
  9
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
Cash from operations, $m
  20
  -5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  18
  18
  19
  20
  21
  23
  24
  25
  26
  27
Maintenance CAPEX, $m
  0
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
New CAPEX, $m
  -4
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Cash from investing activities, $m
  -4
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -8
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -13
  -13
  -14
Free cash flow, $m
  16
  -8
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
Issuance/(repayment) of debt, $m
  0
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
Issuance/(repurchase) of shares, $m
  -1
  1
  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  
  0
  6
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
Total cash flow (excl. dividends), $m
  16
  -3
  8
  9
  9
  9
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
Retained Cash Flow (-), $m
  5
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -21
  -23
  -24
  -25
  -26
  -27
Prev. year cash balance distribution, $m
 
  9
  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
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
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
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  98.8
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7
  98.7

TESSCO Technologies Incorporated architects and delivers products and value chain solutions to support wireless systems in the United States. It provides base station infrastructure products, including base station antennas, cable and transmission lines, small towers, lightning protection devices, connectors, power systems, enclosures, grounding, jumpers, miscellaneous hardware products, and mobile antennas to build, repair, and upgrade wireless broadband systems; and connector installation, custom jumper assembly, site kitting, and logistics integration services. The company also offers network systems, such as fixed and mobile broadband radio equipment, wireless networking filtering and distributed antenna systems, two-way radios, and security and surveillance products to build and upgrade public and private wireless broadband networks; and training classes, technical support, and engineering design services. In addition, it provides analysis equipment, tools, hardware, GPS, safety and replacement products, and component parts and supplies, as well as various frequency, voltage, and power-measuring devices to install, tune, and maintain wireless communications equipment. Further, the company offers mobile devices and accessory products, such as cellular and smart phone, and data device accessories consisting of replacement batteries, cases, screen protectors, speakers, mobile amplifiers, power supplies, bluetooth and corded headsets, mounts, car antennas, music accessories, and data and memory cards. It sells its products to carrier and public network operators, tower owners, program managers, contractors and integrators, wireless Internet service providers, industrial and enterprise self-maintained users, governments, manufacturers, value-added resellers, retail carrier stores, and local and national retailers under the Ventev, Wireless Solutions, and TerraWave brands. The company was founded in 1982 and is headquartered in Hunt Valley, Maryland.

FINANCIAL RATIOS  of  Tessco Technologies (TESS)

Valuation Ratios
P/E Ratio 116.5
Price to Sales 0.2
Price to Book 1.1
Price to Tangible Book
Price to Cash Flow 5.8
Price to Free Cash Flow 7.3
Growth Rates
Sales Growth Rate 0.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 33.3%
Cap. Spend. - 3 Yr. Gr. Rate -4.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 0.6%
Ret/ On Assets - 3 Yr. Avg. 2.7%
Return On Total Capital 0.9%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity 0.9%
Return On Equity - 3 Yr. Avg. 4.4%
Asset Turnover 3.1
Profitability Ratios
Gross Margin 21%
Gross Margin - 3 Yr. Avg. 21.2%
EBITDA Margin 1.3%
EBITDA Margin - 3 Yr. Avg. 2.5%
Operating Margin 0.4%
Oper. Margin - 3 Yr. Avg. 1.6%
Pre-Tax Margin 0.4%
Pre-Tax Margin - 3 Yr. Avg. 1.5%
Net Profit Margin 0.2%
Net Profit Margin - 3 Yr. Avg. 0.9%
Effective Tax Rate 50%
Eff/ Tax Rate - 3 Yr. Avg. 43.4%
Payout Ratio 700%

TESS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TESS stock intrinsic value calculation we used $533 million for the last fiscal year's total revenue generated by Tessco Technologies. The default revenue input number comes from 2017 income statement of Tessco Technologies. 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 TESS stock valuation model: a) initial revenue growth rate of 7.9% 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 TESS is calculated based on our internal credit rating of Tessco Technologies, 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 Tessco Technologies.
    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 TESS stock the variable cost ratio is equal to 98.3%.

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 TESS 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 Tessco Technologies.

Corporate tax rate of 27% is the nominal tax rate for Tessco Technologies. 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 TESS 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 TESS are equal to 1.9%.

Life of production assets of 4.4 years is the average useful life of capital assets used in Tessco Technologies 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 TESS is equal to 12.8%. 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 - $108 million for Tessco Technologies - 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 8.418 million for Tessco Technologies 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 Tessco Technologies at the current share price and the inputted number of shares is $0.1 billion.


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COMPANY NEWS

▶ Tessco reports 4Q loss   [May-08-17 06:14PM  Associated Press]
▶ Tessco posts 3Q profit   [04:24PM  AP]
▶ Does PRGX Global Inc (PRGX) Stack Up Against Its Peers?   [Dec-16-16 08:54PM  at Insider Monkey]
▶ Tessco Technologies names new CEO   [Sep-01-16 03:00PM  at bizjournals.com]
▶ Tessco posts 1Q profit   [04:36PM  AP]
▶ CommScope Executive David Strauss Joins TESSCO   [Mar-08-16 09:03AM  Business Wire]
▶ TESSCO Introduces New Solutions at TESSCO ONE   [Feb-22-16 09:15AM  Business Wire]
▶ Should You Buy TESSCO Technologies, Inc. (TESS)?   [Nov-27  09:17AM  at Insider Monkey]
Stock chart of TESS Financial statements of TESS Annual reports of TESS
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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