Intrinsic value of Trecora Resources - TREC

Previous Close

$12.30

  Intrinsic Value

$7.48

stock screener

  Rating & Target

sell

-39%

  Value-price divergence*

-12%

Previous close

$12.30

 
Intrinsic value

$7.48

 
Up/down potential

-39%

 
Rating

sell

 
Value-price divergence*

-12%

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

We calculate the intrinsic value of TREC 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 0.3

 

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, %
  -12.40
  7.70
  7.43
  7.19
  6.97
  6.77
  6.59
  6.43
  6.29
  6.16
  6.05
  5.94
  5.85
  5.76
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.36
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.17
  5.16
  5.14
  5.13
Revenue, $m
  212
  228
  245
  263
  281
  300
  320
  341
  362
  384
  408
  432
  457
  483
  511
  540
  570
  601
  634
  668
  704
  741
  781
  822
  865
  910
  957
  1,007
  1,059
  1,113
  1,170
Variable operating expenses, $m
 
  183
  196
  210
  225
  240
  256
  272
  289
  307
  325
  342
  362
  383
  405
  427
  451
  476
  502
  529
  557
  587
  618
  650
  685
  720
  758
  797
  838
  881
  926
Fixed operating expenses, $m
 
  12
  13
  13
  13
  14
  14
  14
  15
  15
  15
  16
  16
  17
  17
  17
  18
  18
  19
  19
  20
  20
  21
  21
  22
  22
  23
  23
  24
  25
  25
Total operating expenses, $m
  182
  195
  209
  223
  238
  254
  270
  286
  304
  322
  340
  358
  378
  400
  422
  444
  469
  494
  521
  548
  577
  607
  639
  671
  707
  742
  781
  820
  862
  906
  951
Operating income, $m
  30
  33
  36
  40
  43
  47
  51
  55
  59
  63
  67
  74
  79
  84
  90
  95
  101
  107
  113
  120
  127
  134
  142
  150
  158
  167
  177
  186
  197
  207
  219
EBITDA, $m
  40
  45
  49
  53
  57
  61
  66
  71
  76
  81
  86
  92
  98
  104
  110
  117
  124
  132
  139
  147
  156
  165
  174
  184
  194
  205
  216
  228
  240
  253
  266
Interest expense (income), $m
  3
  3
  3
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  21
  22
Earnings before tax, $m
  30
  30
  33
  36
  39
  43
  46
  49
  53
  57
  61
  67
  72
  76
  81
  86
  91
  97
  102
  108
  115
  121
  128
  135
  143
  151
  159
  168
  177
  187
  197
Tax expense, $m
  11
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  18
  19
  21
  22
  23
  25
  26
  28
  29
  31
  33
  35
  37
  39
  41
  43
  45
  48
  50
  53
Net income, $m
  19
  22
  24
  26
  29
  31
  34
  36
  39
  42
  45
  49
  52
  56
  59
  63
  67
  71
  75
  79
  84
  88
  94
  99
  104
  110
  116
  123
  129
  136
  144

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  8
  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
  292
  306
  329
  352
  377
  403
  429
  457
  485
  515
  546
  579
  613
  648
  685
  723
  764
  806
  850
  895
  944
  994
  1,046
  1,102
  1,159
  1,220
  1,283
  1,349
  1,419
  1,492
  1,568
Adjusted assets (=assets-cash), $m
  284
  306
  329
  352
  377
  403
  429
  457
  485
  515
  546
  579
  613
  648
  685
  723
  764
  806
  850
  895
  944
  994
  1,046
  1,102
  1,159
  1,220
  1,283
  1,349
  1,419
  1,492
  1,568
Revenue / Adjusted assets
  0.746
  0.745
  0.745
  0.747
  0.745
  0.744
  0.746
  0.746
  0.746
  0.746
  0.747
  0.746
  0.746
  0.745
  0.746
  0.747
  0.746
  0.746
  0.746
  0.746
  0.746
  0.745
  0.747
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
Average production assets, $m
  142
  153
  164
  176
  188
  201
  214
  228
  243
  258
  273
  289
  306
  324
  342
  362
  382
  403
  425
  448
  472
  497
  523
  551
  579
  610
  641
  674
  709
  746
  784
Working capital, $m
  31
  36
  38
  41
  44
  47
  50
  53
  56
  60
  64
  67
  71
  75
  80
  84
  89
  94
  99
  104
  110
  116
  122
  128
  135
  142
  149
  157
  165
  174
  183
Total debt, $m
  83
  84
  94
  104
  114
  125
  136
  148
  160
  173
  186
  200
  214
  229
  245
  261
  278
  296
  314
  334
  354
  375
  398
  421
  445
  471
  498
  526
  555
  586
  618
Total liabilities, $m
  128
  129
  139
  149
  159
  170
  181
  193
  205
  218
  231
  245
  259
  274
  290
  306
  323
  341
  359
  379
  399
  420
  443
  466
  490
  516
  543
  571
  600
  631
  663
Total equity, $m
  164
  177
  190
  203
  218
  232
  248
  264
  280
  297
  315
  334
  354
  374
  395
  417
  441
  465
  490
  517
  544
  573
  604
  636
  669
  704
  740
  779
  819
  861
  905
Total liabilities and equity, $m
  292
  306
  329
  352
  377
  402
  429
  457
  485
  515
  546
  579
  613
  648
  685
  723
  764
  806
  849
  896
  943
  993
  1,047
  1,102
  1,159
  1,220
  1,283
  1,350
  1,419
  1,492
  1,568
Debt-to-equity ratio
  0.506
  0.480
  0.500
  0.510
  0.530
  0.540
  0.550
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
  0.610
  0.620
  0.630
  0.630
  0.640
  0.640
  0.650
  0.650
  0.650
  0.660
  0.660
  0.670
  0.670
  0.670
  0.680
  0.680
  0.680
  0.680
Adjusted equity ratio
  0.549
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577
  0.577

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  19
  22
  24
  26
  29
  31
  34
  36
  39
  42
  45
  49
  52
  56
  59
  63
  67
  71
  75
  79
  84
  88
  94
  99
  104
  110
  116
  123
  129
  136
  144
Depreciation, amort., depletion, $m
  10
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  18
  19
  20
  21
  22
  23
  25
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  43
  45
  48
Funds from operations, $m
  30
  34
  36
  39
  42
  46
  49
  52
  56
  60
  63
  67
  71
  75
  80
  85
  90
  95
  101
  106
  112
  119
  125
  132
  140
  147
  155
  164
  173
  182
  192
Change in working capital, $m
  1
  3
  3
  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
  8
  9
Cash from operations, $m
  29
  31
  34
  37
  40
  43
  46
  49
  52
  56
  60
  63
  67
  71
  76
  80
  85
  90
  96
  101
  107
  113
  119
  126
  133
  140
  148
  156
  164
  173
  183
Maintenance CAPEX, $m
  0
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
New CAPEX, $m
  -40
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
Cash from investing activities, $m
  -41
  -20
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -32
  -33
  -35
  -37
  -38
  -40
  -42
  -44
  -47
  -49
  -51
  -54
  -56
  -60
  -63
  -65
  -69
  -72
  -76
  -79
  -83
Free cash flow, $m
  -12
  11
  13
  15
  17
  18
  20
  22
  24
  26
  28
  30
  33
  35
  38
  40
  43
  46
  49
  52
  56
  59
  63
  67
  71
  75
  79
  84
  89
  94
  99
Issuance/(repayment) of debt, $m
  2
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  29
  31
  32
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  
  2
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  26
  27
  28
  29
  31
  32
Total cash flow (excl. dividends), $m
  -10
  21
  23
  25
  27
  29
  31
  34
  36
  39
  42
  44
  47
  50
  53
  57
  60
  64
  68
  72
  76
  80
  85
  90
  95
  100
  106
  112
  118
  125
  131
Retained Cash Flow (-), $m
  -22
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -33
  -35
  -37
  -38
  -40
  -42
  -44
Prev. year cash balance distribution, $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 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
 
  8
  10
  11
  13
  14
  16
  18
  20
  22
  24
  25
  27
  30
  32
  34
  37
  40
  42
  45
  48
  51
  55
  58
  62
  65
  69
  74
  78
  82
  87
Discount rate, %
 
  5.50
  5.78
  6.06
  6.37
  6.69
  7.02
  7.37
  7.74
  8.13
  8.53
  8.96
  9.41
  9.88
  10.37
  10.89
  11.43
  12.01
  12.61
  13.24
  13.90
  14.59
  15.32
  16.09
  16.89
  17.74
  18.62
  19.56
  20.53
  21.56
  22.64
PV of cash for distribution, $m
 
  8
  9
  9
  10
  10
  11
  11
  11
  11
  10
  10
  9
  9
  8
  7
  7
  6
  5
  4
  4
  3
  2
  2
  1
  1
  1
  1
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Trecora Resources primarily manufactures and sells various specialty petrochemical products and synthetic waxes in the United States. The company operates two segments, Petrochemical and Specialty Waxes. The Petrochemical segment produces hydrocarbons and other petroleum based products, including isopentane, normal pentane, isohexane, and hexane used in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, and crude oil from the Canadian tar sands, as well as in the catalyst support industry. This segment also owns and operates pipelines. The Specialty Waxes segment offers specialty polyethylene waxes used in the paints, inks, adhesives, coatings, and PVC lubricants markets; and specialized synthetic poly alpha olefin waxes for use as toner in printers, as well as additives for candles. It also provides custom processing services. In addition, Trecora Resources produces copper and zinc concentrates, and silver and gold doré. The company was formerly known as Arabian American Development Company and changed its name to Trecora Resources in June 2014. Trecora Resources was founded in 1967 and is based in Sugar Land, Texas.

FINANCIAL RATIOS  of  Trecora Resources (TREC)

Valuation Ratios
P/E Ratio 15.9
Price to Sales 1.4
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 10.4
Price to Free Cash Flow -27.4
Growth Rates
Sales Growth Rate -12.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 29%
Cap. Spend. - 3 Yr. Gr. Rate 41.7%
Financial Strength
Quick Ratio 1
Current Ratio 0.1
LT Debt to Equity 44.5%
Total Debt to Equity 50.6%
Interest Coverage 11
Management Effectiveness
Return On Assets 7.6%
Ret/ On Assets - 3 Yr. Avg. 8.3%
Return On Total Capital 8.1%
Ret/ On T. Cap. - 3 Yr. Avg. 9%
Return On Equity 12.4%
Return On Equity - 3 Yr. Avg. 13.7%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 18.9%
Gross Margin - 3 Yr. Avg. 19.7%
EBITDA Margin 20.3%
EBITDA Margin - 3 Yr. Avg. 15.5%
Operating Margin 14.2%
Oper. Margin - 3 Yr. Avg. 12.7%
Pre-Tax Margin 14.2%
Pre-Tax Margin - 3 Yr. Avg. 11.2%
Net Profit Margin 9%
Net Profit Margin - 3 Yr. Avg. 7.4%
Effective Tax Rate 36.7%
Eff/ Tax Rate - 3 Yr. Avg. 33.1%
Payout Ratio 0%

TREC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TREC stock intrinsic value calculation we used $212 million for the last fiscal year's total revenue generated by Trecora Resources. The default revenue input number comes from 2016 income statement of Trecora Resources. 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 TREC stock valuation model: a) initial revenue growth rate of 7.7% 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 5.5%, whose default value for TREC is calculated based on our internal credit rating of Trecora Resources, 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 Trecora Resources.
    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 TREC stock the variable cost ratio is equal to 80.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $12 million in the base year in the intrinsic value calculation for TREC 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 3.7% for Trecora Resources.

Corporate tax rate of 27% is the nominal tax rate for Trecora Resources. 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 TREC 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 TREC are equal to 67%.

Life of production assets of 16.4 years is the average useful life of capital assets used in Trecora Resources 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 TREC is equal to 15.6%. 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 - $164 million for Trecora Resources - 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 24.107 million for Trecora Resources 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 Trecora Resources at the current share price and the inputted number of shares is $0.3 billion.

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COMPANY NEWS

▶ Trecora Resources Reports Second Quarter 2017 Results   [Aug-03-17 04:05PM  PR Newswire]
▶ LD Micro Index Reconstitution as of August 1, 2017   [Aug-01-17 09:40AM  ACCESSWIRE]
▶ Trecora posts 1Q profit   [May-04-17 06:36PM  Associated Press]
▶ Trecora Resources Announces Re-start of AMAK Operations   [Jan-05-17 04:15PM  PR Newswire]
▶ Is LSI Industries, Inc. (LYTS) A Good Stock To Buy?   [Dec-12-16 05:09PM  at Insider Monkey]
▶ Trecora Resources Announces AMAK Share Issuance   [Jul-20-16 07:00AM  PR Newswire]
▶ Exxon Mobil Stock: Analyzing 5 Key Suppliers (XOM, PKD)   [Apr-30-16 08:40PM  at Investopedia]
Stock chart of TREC Financial statements of TREC
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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