Intrinsic value of Frequency Electronics - FEIM

Previous Close

$9.75

  Intrinsic Value

$2.55

stock screener

  Rating & Target

str. sell

-74%

  Value-price divergence*

-4%

Previous close

$9.75

 
Intrinsic value

$2.55

 
Up/down potential

-74%

 
Rating

str. sell

 
Value-price divergence*

-4%

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

We calculate the intrinsic value of FEIM 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, %
  -9.09
  33.30
  30.47
  27.92
  25.63
  23.57
  21.71
  20.04
  18.54
  17.18
  15.96
  14.87
  13.88
  12.99
  12.19
  11.47
  10.83
  10.24
  9.72
  9.25
  8.82
  8.44
  8.10
  7.79
  7.51
  7.26
  7.03
  6.83
  6.65
  6.48
  6.33
Revenue, $m
  50
  67
  87
  111
  140
  173
  210
  252
  299
  350
  406
  467
  532
  601
  674
  751
  833
  918
  1,007
  1,100
  1,197
  1,298
  1,403
  1,513
  1,626
  1,744
  1,867
  1,995
  2,127
  2,265
  2,408
Variable operating expenses, $m
 
  64
  83
  107
  134
  166
  202
  242
  287
  336
  390
  448
  510
  577
  647
  721
  799
  881
  967
  1,056
  1,149
  1,246
  1,347
  1,452
  1,561
  1,675
  1,792
  1,915
  2,042
  2,174
  2,312
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
  58
  64
  83
  107
  134
  166
  202
  242
  287
  336
  390
  448
  510
  577
  647
  721
  799
  881
  967
  1,056
  1,149
  1,246
  1,347
  1,452
  1,561
  1,675
  1,792
  1,915
  2,042
  2,174
  2,312
Operating income, $m
  -8
  3
  3
  4
  6
  7
  8
  10
  12
  14
  16
  19
  21
  24
  27
  30
  33
  37
  40
  44
  48
  52
  56
  61
  65
  70
  75
  80
  85
  91
  96
EBITDA, $m
  -5
  7
  9
  11
  14
  17
  21
  25
  29
  34
  40
  46
  52
  59
  66
  74
  82
  90
  99
  108
  117
  127
  138
  148
  159
  171
  183
  195
  208
  222
  236
Interest expense (income), $m
  0
  0
  0
  1
  1
  2
  2
  3
  3
  4
  5
  6
  7
  8
  9
  10
  12
  13
  15
  16
  18
  19
  21
  23
  25
  27
  28
  31
  33
  35
  37
Earnings before tax, $m
  -7
  3
  3
  4
  5
  5
  6
  7
  9
  10
  11
  13
  14
  16
  18
  20
  22
  24
  26
  28
  30
  33
  35
  38
  40
  43
  46
  49
  52
  56
  59
Tax expense, $m
  -2
  1
  1
  1
  1
  1
  2
  2
  2
  3
  3
  3
  4
  4
  5
  5
  6
  6
  7
  8
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  16
Net income, $m
  -5
  2
  2
  3
  3
  4
  5
  5
  6
  7
  8
  9
  10
  12
  13
  14
  16
  17
  19
  20
  22
  24
  26
  28
  30
  32
  34
  36
  38
  41
  43

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  10
  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
  113
  137
  179
  229
  288
  356
  433
  520
  617
  723
  838
  963
  1,096
  1,239
  1,390
  1,549
  1,717
  1,893
  2,076
  2,269
  2,469
  2,677
  2,894
  3,119
  3,353
  3,597
  3,850
  4,112
  4,386
  4,670
  4,966
Adjusted assets (=assets-cash), $m
  103
  137
  179
  229
  288
  356
  433
  520
  617
  723
  838
  963
  1,096
  1,239
  1,390
  1,549
  1,717
  1,893
  2,076
  2,269
  2,469
  2,677
  2,894
  3,119
  3,353
  3,597
  3,850
  4,112
  4,386
  4,670
  4,966
Revenue / Adjusted assets
  0.485
  0.489
  0.486
  0.485
  0.486
  0.486
  0.485
  0.485
  0.485
  0.484
  0.484
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
Average production assets, $m
  15
  19
  25
  32
  41
  50
  61
  73
  87
  102
  118
  135
  154
  174
  195
  218
  241
  266
  292
  319
  347
  377
  407
  439
  472
  506
  541
  578
  617
  657
  698
Working capital, $m
  62
  33
  43
  56
  70
  86
  105
  126
  150
  175
  203
  233
  266
  300
  337
  376
  416
  459
  504
  550
  599
  649
  702
  756
  813
  872
  934
  997
  1,064
  1,132
  1,204
Total debt, $m
  0
  8
  18
  29
  43
  59
  77
  97
  120
  144
  171
  200
  231
  265
  300
  337
  376
  417
  460
  505
  551
  600
  650
  703
  757
  814
  873
  934
  998
  1,064
  1,133
Total liabilities, $m
  24
  32
  42
  53
  67
  83
  101
  121
  144
  168
  195
  224
  255
  289
  324
  361
  400
  441
  484
  529
  575
  624
  674
  727
  781
  838
  897
  958
  1,022
  1,088
  1,157
Total equity, $m
  89
  105
  138
  176
  221
  273
  332
  399
  473
  554
  643
  738
  841
  950
  1,066
  1,188
  1,317
  1,452
  1,593
  1,740
  1,893
  2,053
  2,220
  2,392
  2,572
  2,759
  2,953
  3,154
  3,364
  3,582
  3,809
Total liabilities and equity, $m
  113
  137
  180
  229
  288
  356
  433
  520
  617
  722
  838
  962
  1,096
  1,239
  1,390
  1,549
  1,717
  1,893
  2,077
  2,269
  2,468
  2,677
  2,894
  3,119
  3,353
  3,597
  3,850
  4,112
  4,386
  4,670
  4,966
Debt-to-equity ratio
  0.000
  0.080
  0.130
  0.170
  0.200
  0.220
  0.230
  0.240
  0.250
  0.260
  0.270
  0.270
  0.280
  0.280
  0.280
  0.280
  0.290
  0.290
  0.290
  0.290
  0.290
  0.290
  0.290
  0.290
  0.290
  0.300
  0.300
  0.300
  0.300
  0.300
  0.300
Adjusted equity ratio
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767
  0.767

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -5
  2
  2
  3
  3
  4
  5
  5
  6
  7
  8
  9
  10
  12
  13
  14
  16
  17
  19
  20
  22
  24
  26
  28
  30
  32
  34
  36
  38
  41
  43
Depreciation, amort., depletion, $m
  3
  4
  5
  6
  8
  10
  12
  15
  17
  20
  24
  27
  31
  35
  39
  44
  48
  53
  58
  64
  69
  75
  81
  88
  94
  101
  108
  116
  123
  131
  140
Funds from operations, $m
  -1
  6
  7
  9
  11
  14
  17
  20
  24
  28
  32
  36
  41
  46
  52
  58
  64
  70
  77
  84
  92
  99
  107
  115
  124
  133
  142
  152
  162
  172
  183
Change in working capital, $m
  -5
  8
  10
  12
  14
  16
  19
  21
  23
  26
  28
  30
  32
  35
  37
  39
  41
  43
  45
  47
  49
  51
  53
  55
  57
  59
  61
  64
  66
  69
  72
Cash from operations, $m
  4
  -3
  -3
  -3
  -3
  -3
  -2
  -1
  0
  2
  4
  6
  9
  12
  15
  19
  23
  28
  33
  38
  43
  49
  54
  61
  67
  74
  81
  88
  95
  103
  111
Maintenance CAPEX, $m
  0
  -3
  -4
  -5
  -6
  -8
  -10
  -12
  -15
  -17
  -20
  -24
  -27
  -31
  -35
  -39
  -44
  -48
  -53
  -58
  -64
  -69
  -75
  -81
  -88
  -94
  -101
  -108
  -116
  -123
  -131
New CAPEX, $m
  -5
  -5
  -6
  -7
  -8
  -10
  -11
  -12
  -14
  -15
  -16
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -32
  -33
  -34
  -36
  -37
  -38
  -40
  -42
Cash from investing activities, $m
  -1
  -8
  -10
  -12
  -14
  -18
  -21
  -24
  -29
  -32
  -36
  -42
  -46
  -51
  -56
  -61
  -68
  -73
  -79
  -85
  -92
  -98
  -105
  -113
  -121
  -128
  -137
  -145
  -154
  -163
  -173
Free cash flow, $m
  3
  -10
  -13
  -15
  -18
  -20
  -23
  -25
  -28
  -30
  -33
  -35
  -37
  -39
  -41
  -42
  -44
  -45
  -47
  -48
  -49
  -50
  -51
  -52
  -54
  -55
  -56
  -57
  -59
  -60
  -62
Issuance/(repayment) of debt, $m
  -6
  8
  10
  12
  14
  16
  18
  20
  22
  25
  27
  29
  31
  33
  35
  37
  39
  41
  43
  45
  47
  49
  51
  53
  55
  57
  59
  61
  64
  66
  69
Issuance/(repurchase) of shares, $m
  0
  24
  30
  36
  42
  48
  55
  61
  68
  74
  80
  86
  92
  98
  103
  108
  113
  118
  122
  127
  131
  136
  141
  145
  150
  155
  160
  166
  171
  177
  184
Cash from financing (excl. dividends), $m  
  -7
  32
  40
  48
  56
  64
  73
  81
  90
  99
  107
  115
  123
  131
  138
  145
  152
  159
  165
  172
  178
  185
  192
  198
  205
  212
  219
  227
  235
  243
  253
Total cash flow (excl. dividends), $m
  -3
  22
  27
  32
  38
  44
  50
  56
  62
  68
  74
  80
  86
  92
  97
  103
  108
  113
  119
  124
  129
  134
  140
  145
  151
  157
  163
  170
  176
  183
  191
Retained Cash Flow (-), $m
  4
  -26
  -32
  -38
  -45
  -52
  -59
  -67
  -74
  -81
  -88
  -96
  -102
  -109
  -116
  -122
  -129
  -135
  -141
  -147
  -154
  -160
  -166
  -173
  -180
  -187
  -194
  -202
  -210
  -218
  -227
Prev. year cash balance distribution, $m
 
  10
  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
 
  6
  -5
  -6
  -7
  -8
  -9
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -32
  -33
  -35
  -36
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
 
  6
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -7
  -7
  -7
  -7
  -7
  -6
  -6
  -5
  -5
  -4
  -4
  -3
  -3
  -2
  -2
  -1
  -1
  -1
  -1
  -1
  0
  0
Current shareholders' claim on cash, %
  100
  75.5
  58.3
  45.9
  36.8
  29.9
  24.8
  20.8
  17.6
  15.2
  13.2
  11.5
  10.2
  9.1
  8.2
  7.4
  6.7
  6.1
  5.7
  5.2
  4.8
  4.5
  4.2
  3.9
  3.7
  3.5
  3.3
  3.1
  2.9
  2.8
  2.6

Frequency Electronics, Inc. (FEI) is principally engaged in the design, development and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. The Company operates in three segments: FEI-NY, Gillam-FEI and FEI-Zyfer. The FEI-NY segment also includes the operations of the Company's subsidiaries, Frequency Electronics, Inc. Asia (FEI-Asia) and FEI-Elcom Tech, Inc. (FEI-Elcom). It operates through several facilities located across the world, which is used for manufacturing its products and for administrative activities, which includes Long Island, New York; Garden Grove, California; Liege, Belgium; Tianjin, China, and Rockleigh, New Jersey. The Company's services are employed in commercial, government, command, control, communication, computer, intelligence, security and reconnaissance (C4ISR) and other military electronic systems. Its technology is used for a range of terrestrial and space applications.

FINANCIAL RATIOS  of  Frequency Electronics (FEIM)

Valuation Ratios
P/E Ratio -17.2
Price to Sales 1.7
Price to Book 1
Price to Tangible Book
Price to Cash Flow 21.5
Price to Free Cash Flow -86
Growth Rates
Sales Growth Rate -9.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 66.7%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio NaN
Current Ratio 1.4
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets -4.3%
Ret/ On Assets - 3 Yr. Avg. -0.3%
Return On Total Capital -5.3%
Ret/ On T. Cap. - 3 Yr. Avg. -0.4%
Return On Equity -5.5%
Return On Equity - 3 Yr. Avg. -0.4%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 22%
Gross Margin - 3 Yr. Avg. 29.2%
EBITDA Margin -8%
EBITDA Margin - 3 Yr. Avg. 4.4%
Operating Margin -16%
Oper. Margin - 3 Yr. Avg. -2.4%
Pre-Tax Margin -14%
Pre-Tax Margin - 3 Yr. Avg. -0.7%
Net Profit Margin -10%
Net Profit Margin - 3 Yr. Avg. -1.4%
Effective Tax Rate 28.6%
Eff/ Tax Rate - 3 Yr. Avg. 34%
Payout Ratio 0%

FEIM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FEIM stock intrinsic value calculation we used $50 million for the last fiscal year's total revenue generated by Frequency Electronics. The default revenue input number comes from 2017 income statement of Frequency Electronics. 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 FEIM stock valuation model: a) initial revenue growth rate of 33.3% 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 FEIM is calculated based on our internal credit rating of Frequency Electronics, 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 Frequency Electronics.
    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 FEIM stock the variable cost ratio is equal to 96%.

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 FEIM 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 Frequency Electronics.

Corporate tax rate of 27% is the nominal tax rate for Frequency Electronics. 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 FEIM 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 FEIM are equal to 29%.

Life of production assets of 4.8 years is the average useful life of capital assets used in Frequency Electronics 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 FEIM is equal to 50%. 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 - $89 million for Frequency Electronics - 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 8.729 million for Frequency Electronics 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 Frequency Electronics at the current share price and the inputted number of shares is $0.1 billion.

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COMPANY NEWS

▶ Frequency Electronics posts 1Q profit   [Sep-13-17 11:30PM  Associated Press]
▶ Frequency Electronics posts 3Q profit   [Mar-16-17 09:51AM  Associated Press]
▶ Webcast-Q3 Earnings Call for Frequency Electronics, Inc.   [Mar-14-17 12:13AM  at Company Spotlight]
▶ Frequency Electronics reports 2Q loss   [Dec-14-16 05:04PM  Associated Press]
▶ Hardinge Inc. Appoints Ryan Levenson to Board of Directors   [Nov-03-16 12:09PM  GlobeNewswire]
▶ Frequency Electronics Appoints New Chief Financial Officer   [Apr-29-16 10:00AM  GlobeNewswire]
Financial statements of FEIM
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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