Intrinsic value of FARO Technologies - FARO

Previous Close

$37.55

  Intrinsic Value

$11.78

stock screener

  Rating & Target

str. sell

-69%

Previous close

$37.55

 
Intrinsic value

$11.78

 
Up/down potential

-69%

 
Rating

str. sell

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

We calculate the intrinsic value of FARO 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, %
  2.52
  5.10
  5.09
  5.08
  5.07
  5.07
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
  5.03
  5.03
  5.03
  5.02
  5.02
  5.02
  5.02
  5.02
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.00
Revenue, $m
  326
  343
  360
  378
  398
  418
  439
  461
  484
  509
  534
  561
  589
  619
  650
  683
  717
  753
  791
  831
  872
  916
  962
  1,010
  1,061
  1,114
  1,170
  1,228
  1,290
  1,354
  1,422
Variable operating expenses, $m
 
  328
  344
  361
  379
  398
  418
  439
  461
  484
  508
  529
  556
  584
  613
  644
  676
  710
  746
  783
  822
  863
  907
  952
  1,000
  1,050
  1,102
  1,158
  1,216
  1,276
  1,340
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
  312
  328
  344
  361
  379
  398
  418
  439
  461
  484
  508
  529
  556
  584
  613
  644
  676
  710
  746
  783
  822
  863
  907
  952
  1,000
  1,050
  1,102
  1,158
  1,216
  1,276
  1,340
Operating income, $m
  13
  15
  16
  17
  18
  19
  20
  22
  23
  25
  26
  32
  34
  36
  37
  39
  41
  43
  45
  48
  50
  53
  55
  58
  61
  64
  67
  71
  74
  78
  82
EBITDA, $m
  27
  28
  30
  31
  33
  35
  36
  38
  40
  42
  44
  47
  49
  51
  54
  57
  59
  62
  66
  69
  72
  76
  80
  84
  88
  92
  97
  102
  107
  112
  118
Interest expense (income), $m
  0
  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
Earnings before tax, $m
  13
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  52
  55
  57
  60
  63
  66
  69
  72
Tax expense, $m
  2
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  15
  15
  16
  17
  18
  19
  20
Net income, $m
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  149
  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
  424
  289
  304
  319
  335
  352
  370
  389
  409
  429
  451
  474
  497
  522
  549
  576
  605
  636
  667
  701
  736
  773
  812
  852
  895
  940
  987
  1,036
  1,088
  1,143
  1,200
Adjusted assets (=assets-cash), $m
  275
  289
  304
  319
  335
  352
  370
  389
  409
  429
  451
  474
  497
  522
  549
  576
  605
  636
  667
  701
  736
  773
  812
  852
  895
  940
  987
  1,036
  1,088
  1,143
  1,200
Revenue / Adjusted assets
  1.185
  1.187
  1.184
  1.185
  1.188
  1.188
  1.186
  1.185
  1.183
  1.186
  1.184
  1.184
  1.185
  1.186
  1.184
  1.186
  1.185
  1.184
  1.186
  1.185
  1.185
  1.185
  1.185
  1.185
  1.185
  1.185
  1.185
  1.185
  1.186
  1.185
  1.185
Average production assets, $m
  53
  56
  59
  62
  65
  68
  72
  75
  79
  83
  87
  91
  96
  101
  106
  111
  117
  123
  129
  135
  142
  149
  157
  165
  173
  182
  191
  200
  210
  221
  232
Working capital, $m
  212
  66
  69
  73
  77
  81
  85
  89
  93
  98
  103
  108
  114
  119
  125
  132
  138
  145
  153
  160
  168
  177
  186
  195
  205
  215
  226
  237
  249
  261
  274
Total debt, $m
  0
  4
  9
  13
  18
  24
  29
  35
  41
  47
  54
  60
  68
  75
  83
  92
  101
  110
  120
  130
  141
  152
  164
  176
  189
  203
  217
  232
  248
  265
  282
Total liabilities, $m
  84
  88
  93
  97
  102
  108
  113
  119
  125
  131
  138
  144
  152
  159
  167
  176
  185
  194
  204
  214
  225
  236
  248
  260
  273
  287
  301
  316
  332
  349
  366
Total equity, $m
  340
  201
  211
  222
  233
  245
  257
  270
  284
  298
  313
  329
  346
  363
  381
  401
  421
  442
  464
  487
  512
  537
  564
  592
  622
  653
  686
  720
  756
  794
  834
Total liabilities and equity, $m
  424
  289
  304
  319
  335
  353
  370
  389
  409
  429
  451
  473
  498
  522
  548
  577
  606
  636
  668
  701
  737
  773
  812
  852
  895
  940
  987
  1,036
  1,088
  1,143
  1,200
Debt-to-equity ratio
  0.000
  0.020
  0.040
  0.060
  0.080
  0.100
  0.110
  0.130
  0.140
  0.160
  0.170
  0.180
  0.200
  0.210
  0.220
  0.230
  0.240
  0.250
  0.260
  0.270
  0.270
  0.280
  0.290
  0.300
  0.300
  0.310
  0.320
  0.320
  0.330
  0.330
  0.340
Adjusted equity ratio
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695
  0.695

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
Depreciation, amort., depletion, $m
  14
  13
  14
  14
  15
  15
  16
  16
  17
  18
  18
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  34
  36
Funds from operations, $m
  41
  24
  25
  27
  28
  29
  30
  32
  33
  35
  36
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  64
  67
  70
  74
  77
  81
  85
  89
Change in working capital, $m
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
Cash from operations, $m
  38
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
  31
  33
  34
  36
  38
  39
  41
  43
  45
  47
  50
  52
  55
  57
  60
  63
  66
  69
  72
  76
Maintenance CAPEX, $m
  0
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -31
  -33
  -34
New CAPEX, $m
  -9
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
Cash from investing activities, $m
  -37
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -34
  -36
  -37
  -40
  -41
  -44
  -45
Free cash flow, $m
  1
  10
  10
  11
  11
  12
  12
  13
  13
  13
  14
  13
  14
  14
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  27
  28
  29
  30
Issuance/(repayment) of debt, $m
  0
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  17
Issuance/(repurchase) of shares, $m
  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
  0
Cash from financing (excl. dividends), $m  
  0
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  17
Total cash flow (excl. dividends), $m
  -1
  14
  15
  16
  16
  17
  18
  18
  19
  20
  21
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
Retained Cash Flow (-), $m
  -12
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -40
Prev. year cash balance distribution, $m
 
  149
  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
 
  153
  5
  5
  5
  5
  5
  5
  5
  5
  6
  4
  5
  5
  5
  5
  5
  5
  5
  6
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
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
 
  147
  4
  4
  4
  4
  4
  4
  3
  3
  3
  2
  2
  2
  2
  1
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  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
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FARO Technologies, Inc. designs, develops, manufactures, markets and supports software driven, three-dimensional (3D) measurement, imaging and realization systems. The Company operates in three segments: Factory Metrology, Construction BIM-CIM and Other. It sells its products through a direct sales force across customers in a range of manufacturing, industrial, architecture, surveying, building construction and law enforcement applications. Its FaroArm, FARO Laser ScanArm, FARO Gage, FARO Laser Tracker, FARO Cobalt Array 3D Imager AMP, and their companion CAM2 software provide for Computer-Aided Design-based inspection and/or factory-level statistical process control and surveying. It operates in international markets throughout the world and maintain sales offices in Australia, Brazil, Canada, China, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Portugal, Singapore, South Korea, Spain, Switzerland, Thailand, Turkey, the United Kingdom, the United States and Vietnam.

FINANCIAL RATIOS  of  FARO Technologies (FARO)

Valuation Ratios
P/E Ratio 56.9
Price to Sales 1.9
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 16.5
Price to Free Cash Flow 21.6
Growth Rates
Sales Growth Rate 2.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -43.8%
Cap. Spend. - 3 Yr. Gr. Rate 5.2%
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 2.6%
Ret/ On Assets - 3 Yr. Avg. 4.7%
Return On Total Capital 3.3%
Ret/ On T. Cap. - 3 Yr. Avg. 5.8%
Return On Equity 3.3%
Return On Equity - 3 Yr. Avg. 5.8%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 54.6%
Gross Margin - 3 Yr. Avg. 54.1%
EBITDA Margin 8.3%
EBITDA Margin - 3 Yr. Avg. 9.7%
Operating Margin 4.3%
Oper. Margin - 3 Yr. Avg. 6.6%
Pre-Tax Margin 4%
Pre-Tax Margin - 3 Yr. Avg. 6.4%
Net Profit Margin 3.4%
Net Profit Margin - 3 Yr. Avg. 5.8%
Effective Tax Rate 15.4%
Eff/ Tax Rate - 3 Yr. Avg. 8.6%
Payout Ratio 0%

FARO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FARO stock intrinsic value calculation we used $326 million for the last fiscal year's total revenue generated by FARO Technologies. The default revenue input number comes from 2016 income statement of FARO 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 FARO stock valuation model: a) initial revenue growth rate of 5.1% 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 FARO is calculated based on our internal credit rating of FARO 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 FARO 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 FARO stock the variable cost ratio is equal to 95.7%.

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 FARO 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 FARO Technologies.

Corporate tax rate of 27% is the nominal tax rate for FARO 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 FARO 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 FARO are equal to 16.3%.

Life of production assets of 6.4 years is the average useful life of capital assets used in FARO 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 FARO is equal to 19.3%. 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 - $340 million for FARO 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 16.708 million for FARO 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 FARO Technologies at the current share price and the inputted number of shares is $0.6 billion.

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COMPANY NEWS

▶ FARO® Extends Next Generation FaroArm® with Quantum M   [Aug-17-17 09:07AM  PR Newswire]
▶ Faro Technologies reports 2Q loss   [Aug-01-17 10:34PM  Associated Press]
▶ 5 ETFs to play the next tech revolution   [Jul-14-17 01:06PM  MarketWatch]
▶ Faro Technologies reports 1Q loss   [May-09-17 05:52PM  Associated Press]
▶ Faro Technologies misses Street 4Q forecasts   [Feb-22-17 04:18PM  Associated Press]
▶ 9 Stocks Joel Greenblatt Continues to Buy   [Nov-30-16 02:41PM  Gurufocus]
Financial statements of FARO
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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