Intrinsic value of Brocade Communications Systems - BRCD

Previous Close

$12.73

  Intrinsic Value

$21.60

stock screener

  Rating & Target

str. buy

+70%

Previous close

$12.73

 
Intrinsic value

$21.60

 
Up/down potential

+70%

 
Rating

str. buy

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

We calculate the intrinsic value of BRCD 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 5.3

 

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, %
  3.67
  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
  2,346
  2,393
  2,448
  2,511
  2,582
  2,660
  2,746
  2,839
  2,940
  3,049
  3,166
  3,292
  3,425
  3,567
  3,719
  3,879
  4,049
  4,229
  4,419
  4,620
  4,833
  5,057
  5,293
  5,542
  5,804
  6,081
  6,371
  6,678
  7,000
  7,339
  7,696
Variable operating expenses, $m
 
  1,869
  1,907
  1,950
  1,998
  2,052
  2,111
  2,175
  2,244
  2,319
  2,399
  2,255
  2,347
  2,444
  2,548
  2,658
  2,774
  2,898
  3,028
  3,166
  3,311
  3,465
  3,627
  3,797
  3,977
  4,166
  4,366
  4,575
  4,796
  5,028
  5,273
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
  2,039
  1,869
  1,907
  1,950
  1,998
  2,052
  2,111
  2,175
  2,244
  2,319
  2,399
  2,255
  2,347
  2,444
  2,548
  2,658
  2,774
  2,898
  3,028
  3,166
  3,311
  3,465
  3,627
  3,797
  3,977
  4,166
  4,366
  4,575
  4,796
  5,028
  5,273
Operating income, $m
  307
  524
  541
  561
  583
  608
  635
  664
  696
  731
  767
  1,036
  1,078
  1,123
  1,171
  1,221
  1,275
  1,331
  1,391
  1,455
  1,521
  1,592
  1,666
  1,745
  1,827
  1,914
  2,006
  2,102
  2,204
  2,310
  2,423
EBITDA, $m
  431
  787
  805
  826
  849
  875
  903
  934
  967
  1,003
  1,042
  1,083
  1,127
  1,173
  1,223
  1,276
  1,332
  1,391
  1,454
  1,520
  1,590
  1,663
  1,741
  1,823
  1,909
  2,000
  2,096
  2,196
  2,302
  2,414
  2,531
Interest expense (income), $m
  28
  53
  54
  56
  58
  61
  63
  66
  70
  73
  77
  81
  85
  90
  95
  100
  106
  112
  118
  124
  131
  139
  146
  155
  163
  172
  182
  192
  203
  214
  225
Earnings before tax, $m
  262
  471
  487
  505
  525
  547
  571
  598
  627
  657
  690
  955
  993
  1,033
  1,076
  1,121
  1,169
  1,220
  1,274
  1,330
  1,390
  1,453
  1,520
  1,590
  1,664
  1,742
  1,824
  1,910
  2,001
  2,097
  2,197
Tax expense, $m
  48
  127
  131
  136
  142
  148
  154
  161
  169
  177
  186
  258
  268
  279
  290
  303
  316
  329
  344
  359
  375
  392
  410
  429
  449
  470
  492
  516
  540
  566
  593
Net income, $m
  214
  344
  355
  369
  383
  399
  417
  436
  457
  480
  504
  697
  725
  754
  785
  818
  853
  891
  930
  971
  1,015
  1,061
  1,110
  1,161
  1,215
  1,272
  1,332
  1,395
  1,461
  1,531
  1,604

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,257
  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
  4,940
  3,757
  3,843
  3,942
  4,053
  4,175
  4,310
  4,457
  4,616
  4,787
  4,971
  5,167
  5,377
  5,600
  5,838
  6,090
  6,356
  6,639
  6,938
  7,253
  7,587
  7,938
  8,309
  8,700
  9,112
  9,546
  10,002
  10,483
  10,989
  11,521
  12,081
Adjusted assets (=assets-cash), $m
  3,683
  3,757
  3,843
  3,942
  4,053
  4,175
  4,310
  4,457
  4,616
  4,787
  4,971
  5,167
  5,377
  5,600
  5,838
  6,090
  6,356
  6,639
  6,938
  7,253
  7,587
  7,938
  8,309
  8,700
  9,112
  9,546
  10,002
  10,483
  10,989
  11,521
  12,081
Revenue / Adjusted assets
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
  0.637
Average production assets, $m
  710
  725
  742
  761
  782
  806
  832
  860
  891
  924
  959
  997
  1,038
  1,081
  1,127
  1,175
  1,227
  1,281
  1,339
  1,400
  1,464
  1,532
  1,604
  1,679
  1,759
  1,842
  1,931
  2,023
  2,121
  2,224
  2,332
Working capital, $m
  978
  -206
  -211
  -216
  -222
  -229
  -236
  -244
  -253
  -262
  -272
  -283
  -295
  -307
  -320
  -334
  -348
  -364
  -380
  -397
  -416
  -435
  -455
  -477
  -499
  -523
  -548
  -574
  -602
  -631
  -662
Total debt, $m
  1,579
  1,549
  1,603
  1,665
  1,735
  1,813
  1,897
  1,990
  2,090
  2,198
  2,314
  2,437
  2,570
  2,710
  2,860
  3,018
  3,187
  3,365
  3,553
  3,752
  3,962
  4,183
  4,417
  4,663
  4,922
  5,196
  5,483
  5,786
  6,105
  6,440
  6,793
Total liabilities, $m
  2,397
  2,367
  2,421
  2,483
  2,553
  2,631
  2,715
  2,808
  2,908
  3,016
  3,132
  3,255
  3,388
  3,528
  3,678
  3,836
  4,005
  4,183
  4,371
  4,570
  4,780
  5,001
  5,235
  5,481
  5,740
  6,014
  6,301
  6,604
  6,923
  7,258
  7,611
Total equity, $m
  2,543
  1,390
  1,422
  1,458
  1,499
  1,545
  1,595
  1,649
  1,708
  1,771
  1,839
  1,912
  1,990
  2,072
  2,160
  2,253
  2,352
  2,456
  2,567
  2,684
  2,807
  2,937
  3,074
  3,219
  3,371
  3,532
  3,701
  3,879
  4,066
  4,263
  4,470
Total liabilities and equity, $m
  4,940
  3,757
  3,843
  3,941
  4,052
  4,176
  4,310
  4,457
  4,616
  4,787
  4,971
  5,167
  5,378
  5,600
  5,838
  6,089
  6,357
  6,639
  6,938
  7,254
  7,587
  7,938
  8,309
  8,700
  9,111
  9,546
  10,002
  10,483
  10,989
  11,521
  12,081
Debt-to-equity ratio
  0.621
  1.110
  1.130
  1.140
  1.160
  1.170
  1.190
  1.210
  1.220
  1.240
  1.260
  1.270
  1.290
  1.310
  1.320
  1.340
  1.350
  1.370
  1.380
  1.400
  1.410
  1.420
  1.440
  1.450
  1.460
  1.470
  1.480
  1.490
  1.500
  1.510
  1.520
Adjusted equity ratio
  0.349
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370
  0.370

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  214
  344
  355
  369
  383
  399
  417
  436
  457
  480
  504
  697
  725
  754
  785
  818
  853
  891
  930
  971
  1,015
  1,061
  1,110
  1,161
  1,215
  1,272
  1,332
  1,395
  1,461
  1,531
  1,604
Depreciation, amort., depletion, $m
  124
  263
  264
  265
  266
  267
  268
  270
  271
  272
  274
  46
  48
  50
  52
  55
  57
  60
  62
  65
  68
  71
  75
  78
  82
  86
  90
  94
  99
  103
  108
Funds from operations, $m
  314
  607
  619
  633
  649
  666
  685
  706
  728
  752
  778
  744
  773
  805
  838
  873
  911
  950
  992
  1,036
  1,083
  1,132
  1,184
  1,239
  1,297
  1,357
  1,421
  1,489
  1,560
  1,634
  1,713
Change in working capital, $m
  -96
  -4
  -5
  -5
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -26
  -28
  -29
  -31
Cash from operations, $m
  410
  611
  624
  639
  655
  673
  693
  714
  737
  762
  788
  755
  785
  817
  851
  887
  925
  966
  1,008
  1,053
  1,101
  1,151
  1,204
  1,260
  1,319
  1,381
  1,446
  1,515
  1,587
  1,663
  1,743
Maintenance CAPEX, $m
  0
  -33
  -34
  -34
  -35
  -36
  -37
  -39
  -40
  -41
  -43
  -45
  -46
  -48
  -50
  -52
  -55
  -57
  -60
  -62
  -65
  -68
  -71
  -75
  -78
  -82
  -86
  -90
  -94
  -99
  -103
New CAPEX, $m
  -77
  -15
  -17
  -19
  -21
  -24
  -26
  -28
  -31
  -33
  -35
  -38
  -40
  -43
  -46
  -49
  -52
  -55
  -58
  -61
  -64
  -68
  -72
  -75
  -79
  -84
  -88
  -93
  -98
  -103
  -108
Cash from investing activities, $m
  -494
  -48
  -51
  -53
  -56
  -60
  -63
  -67
  -71
  -74
  -78
  -83
  -86
  -91
  -96
  -101
  -107
  -112
  -118
  -123
  -129
  -136
  -143
  -150
  -157
  -166
  -174
  -183
  -192
  -202
  -211
Free cash flow, $m
  -84
  563
  574
  585
  598
  613
  629
  647
  666
  687
  710
  672
  698
  725
  755
  786
  819
  854
  891
  930
  972
  1,015
  1,062
  1,110
  1,162
  1,216
  1,273
  1,332
  1,396
  1,462
  1,532
Issuance/(repayment) of debt, $m
  767
  47
  54
  62
  70
  77
  85
  92
  100
  108
  116
  124
  132
  141
  150
  159
  168
  178
  188
  199
  210
  222
  234
  246
  259
  273
  288
  303
  319
  335
  353
Issuance/(repurchase) of shares, $m
  -792
  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  
  -14
  47
  54
  62
  70
  77
  85
  92
  100
  108
  116
  124
  132
  141
  150
  159
  168
  178
  188
  199
  210
  222
  234
  246
  259
  273
  288
  303
  319
  335
  353
Total cash flow (excl. dividends), $m
  -100
  610
  628
  648
  668
  690
  714
  739
  766
  795
  826
  796
  830
  866
  904
  945
  987
  1,032
  1,079
  1,129
  1,182
  1,237
  1,295
  1,357
  1,421
  1,489
  1,560
  1,635
  1,714
  1,797
  1,884
Retained Cash Flow (-), $m
  -9
  -27
  -32
  -37
  -41
  -45
  -50
  -54
  -59
  -63
  -68
  -73
  -78
  -83
  -88
  -93
  -99
  -105
  -111
  -117
  -123
  -130
  -137
  -145
  -152
  -161
  -169
  -178
  -187
  -197
  -207
Prev. year cash balance distribution, $m
 
  1,180
  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
 
  1,763
  596
  611
  627
  645
  664
  685
  708
  732
  758
  723
  752
  783
  816
  851
  888
  927
  969
  1,012
  1,058
  1,107
  1,158
  1,212
  1,269
  1,328
  1,391
  1,457
  1,527
  1,600
  1,677
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
 
  1,690
  546
  532
  516
  500
  482
  463
  442
  420
  397
  343
  321
  298
  274
  250
  226
  202
  178
  156
  134
  114
  96
  79
  65
  52
  41
  31
  24
  17
  13
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

Brocade Communications Systems, Inc. (Brocade) is a supplier of networking hardware, software and services, including storage area networking (SAN) solutions and Internet protocol (IP) networking solutions for businesses and organizations of various types and sizes. The Company operates through three segments: SAN Products, IP Networking Products and Global Services. The SAN Products segment includes infrastructure products and solutions that help customers develop and deploy storage and server consolidation, disaster recovery and data security. The IP Networking Products segment includes Layer 2 and Layer 3 Ethernet switches, and routers to connect users over private and public networks. The Global Services segment includes break or fix maintenance, installation, consulting, network management and software maintenance, and post-contract customer support. Its products enable customers to deploy architectures and technologies, including virtualization and cloud computing.

FINANCIAL RATIOS  of  Brocade Communications Systems (BRCD)

Valuation Ratios
P/E Ratio 23.9
Price to Sales 2.2
Price to Book 2
Price to Tangible Book
Price to Cash Flow 12.5
Price to Free Cash Flow 15.4
Growth Rates
Sales Growth Rate 3.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1.3%
Cap. Spend. - 3 Yr. Gr. Rate 8.2%
Financial Strength
Quick Ratio 16
Current Ratio 0
LT Debt to Equity 59.1%
Total Debt to Equity 62.1%
Interest Coverage 10
Management Effectiveness
Return On Assets 5.3%
Ret/ On Assets - 3 Yr. Avg. 7.2%
Return On Total Capital 5.7%
Ret/ On T. Cap. - 3 Yr. Avg. 8.2%
Return On Equity 8.4%
Return On Equity - 3 Yr. Avg. 10.7%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 64.6%
Gross Margin - 3 Yr. Avg. 66.1%
EBITDA Margin 17.6%
EBITDA Margin - 3 Yr. Avg. 21.4%
Operating Margin 13.1%
Oper. Margin - 3 Yr. Avg. 17.4%
Pre-Tax Margin 11.2%
Pre-Tax Margin - 3 Yr. Avg. 15.5%
Net Profit Margin 9.1%
Net Profit Margin - 3 Yr. Avg. 11.6%
Effective Tax Rate 18.3%
Eff/ Tax Rate - 3 Yr. Avg. 24.5%
Payout Ratio 39.3%

BRCD stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BRCD stock intrinsic value calculation we used $2346 million for the last fiscal year's total revenue generated by Brocade Communications Systems. The default revenue input number comes from 2016 income statement of Brocade Communications Systems. 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 BRCD 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 4.3%, whose default value for BRCD is calculated based on our internal credit rating of Brocade Communications Systems, 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 Brocade Communications Systems.
    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 BRCD stock the variable cost ratio is equal to 78.3%.

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 BRCD 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 Brocade Communications Systems.

Corporate tax rate of 27% is the nominal tax rate for Brocade Communications Systems. 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 BRCD 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 BRCD are equal to 30.3%.

Life of production assets of 21.5 years is the average useful life of capital assets used in Brocade Communications Systems 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 BRCD is equal to -8.6%. 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 - $2543 million for Brocade Communications Systems - 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 413.445 million for Brocade Communications Systems 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 Brocade Communications Systems at the current share price and the inputted number of shares is $5.3 billion.

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Financial statements of BRCD
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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