Intrinsic value of Federal Signal - FSS

Previous Close

$24.17

  Intrinsic Value

$15.53

stock screener

  Rating & Target

sell

-36%

Previous close

$24.17

 
Intrinsic value

$15.53

 
Up/down potential

-36%

 
Rating

sell

We calculate the intrinsic value of FSS 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 1.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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, %
  26.90
  24.71
  22.74
  20.97
  19.37
  17.93
  16.64
  15.47
  14.43
  13.48
  12.64
  11.87
  11.19
  10.57
  10.01
  9.51
  9.06
  8.65
  8.29
  7.96
  7.66
  7.40
  7.16
  6.94
  6.75
  6.57
  6.41
  6.27
  6.15
  6.03
Revenue, $m
  1,141
  1,423
  1,746
  2,112
  2,521
  2,974
  3,468
  4,005
  4,583
  5,201
  5,858
  6,554
  7,287
  8,057
  8,863
  9,706
  10,585
  11,501
  12,454
  13,445
  14,475
  15,546
  16,659
  17,815
  19,017
  20,267
  21,567
  22,920
  24,328
  25,796
Variable operating expenses, $m
  1,033
  1,275
  1,553
  1,868
  2,219
  2,608
  3,033
  3,494
  3,990
  4,521
  5,033
  5,631
  6,260
  6,922
  7,615
  8,339
  9,094
  9,881
  10,700
  11,551
  12,437
  13,356
  14,312
  15,306
  16,338
  17,412
  18,529
  19,692
  20,902
  22,163
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
  1,033
  1,275
  1,553
  1,868
  2,219
  2,608
  3,033
  3,494
  3,990
  4,521
  5,033
  5,631
  6,260
  6,922
  7,615
  8,339
  9,094
  9,881
  10,700
  11,551
  12,437
  13,356
  14,312
  15,306
  16,338
  17,412
  18,529
  19,692
  20,902
  22,163
Operating income, $m
  108
  147
  193
  245
  302
  366
  436
  511
  593
  680
  825
  923
  1,026
  1,135
  1,248
  1,367
  1,491
  1,620
  1,754
  1,894
  2,039
  2,190
  2,346
  2,509
  2,678
  2,854
  3,038
  3,228
  3,426
  3,633
EBITDA, $m
  227
  283
  348
  421
  502
  592
  691
  798
  913
  1,036
  1,167
  1,305
  1,451
  1,604
  1,765
  1,933
  2,108
  2,290
  2,480
  2,678
  2,883
  3,096
  3,317
  3,548
  3,787
  4,036
  4,295
  4,564
  4,845
  5,137
Interest expense (income), $m
  1
  15
  23
  32
  42
  54
  67
  82
  98
  115
  133
  153
  174
  197
  220
  245
  271
  298
  327
  356
  387
  419
  452
  486
  522
  559
  598
  638
  680
  723
  769
Earnings before tax, $m
  93
  125
  161
  202
  248
  299
  354
  414
  478
  546
  672
  749
  829
  914
  1,003
  1,096
  1,193
  1,293
  1,398
  1,507
  1,620
  1,738
  1,860
  1,987
  2,119
  2,257
  2,400
  2,548
  2,703
  2,865
Tax expense, $m
  25
  34
  44
  55
  67
  81
  96
  112
  129
  147
  181
  202
  224
  247
  271
  296
  322
  349
  377
  407
  437
  469
  502
  537
  572
  609
  648
  688
  730
  773
Net income, $m
  68
  91
  118
  148
  181
  218
  258
  302
  349
  399
  490
  546
  605
  667
  732
  800
  871
  944
  1,021
  1,100
  1,183
  1,269
  1,358
  1,451
  1,547
  1,647
  1,752
  1,860
  1,973
  2,091

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  1,261
  1,572
  1,930
  2,334
  2,786
  3,286
  3,832
  4,426
  5,064
  5,747
  6,473
  7,242
  8,052
  8,902
  9,793
  10,725
  11,696
  12,708
  13,761
  14,856
  15,995
  17,178
  18,407
  19,685
  21,013
  22,394
  23,831
  25,326
  26,882
  28,504
Adjusted assets (=assets-cash), $m
  1,261
  1,572
  1,930
  2,334
  2,786
  3,286
  3,832
  4,426
  5,064
  5,747
  6,473
  7,242
  8,052
  8,902
  9,793
  10,725
  11,696
  12,708
  13,761
  14,856
  15,995
  17,178
  18,407
  19,685
  21,013
  22,394
  23,831
  25,326
  26,882
  28,504
Revenue / Adjusted assets
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
  0.905
Average production assets, $m
  665
  829
  1,018
  1,231
  1,470
  1,734
  2,022
  2,335
  2,672
  3,032
  3,415
  3,821
  4,248
  4,697
  5,167
  5,659
  6,171
  6,705
  7,261
  7,839
  8,439
  9,063
  9,712
  10,386
  11,087
  11,815
  12,573
  13,362
  14,183
  15,039
Working capital, $m
  108
  135
  166
  201
  240
  282
  329
  380
  435
  494
  557
  623
  692
  765
  842
  922
  1,006
  1,093
  1,183
  1,277
  1,375
  1,477
  1,583
  1,692
  1,807
  1,925
  2,049
  2,177
  2,311
  2,451
Total debt, $m
  422
  590
  782
  1,000
  1,244
  1,513
  1,808
  2,128
  2,472
  2,840
  3,231
  3,646
  4,082
  4,541
  5,021
  5,523
  6,047
  6,592
  7,160
  7,750
  8,364
  9,001
  9,664
  10,353
  11,068
  11,813
  12,587
  13,393
  14,232
  15,106
Total liabilities, $m
  679
  847
  1,040
  1,258
  1,502
  1,771
  2,066
  2,385
  2,730
  3,098
  3,489
  3,903
  4,340
  4,798
  5,279
  5,781
  6,304
  6,850
  7,417
  8,008
  8,621
  9,259
  9,922
  10,610
  11,326
  12,070
  12,845
  13,651
  14,489
  15,363
Total equity, $m
  581
  725
  890
  1,076
  1,284
  1,515
  1,767
  2,040
  2,335
  2,649
  2,984
  3,338
  3,712
  4,104
  4,515
  4,944
  5,392
  5,858
  6,344
  6,849
  7,374
  7,919
  8,486
  9,075
  9,687
  10,324
  10,986
  11,675
  12,393
  13,140
Total liabilities and equity, $m
  1,260
  1,572
  1,930
  2,334
  2,786
  3,286
  3,833
  4,425
  5,065
  5,747
  6,473
  7,241
  8,052
  8,902
  9,794
  10,725
  11,696
  12,708
  13,761
  14,857
  15,995
  17,178
  18,408
  19,685
  21,013
  22,394
  23,831
  25,326
  26,882
  28,503
Debt-to-equity ratio
  0.730
  0.810
  0.880
  0.930
  0.970
  1.000
  1.020
  1.040
  1.060
  1.070
  1.080
  1.090
  1.100
  1.110
  1.110
  1.120
  1.120
  1.130
  1.130
  1.130
  1.130
  1.140
  1.140
  1.140
  1.140
  1.140
  1.150
  1.150
  1.150
  1.150
Adjusted equity ratio
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  68
  91
  118
  148
  181
  218
  258
  302
  349
  399
  490
  546
  605
  667
  732
  800
  871
  944
  1,021
  1,100
  1,183
  1,269
  1,358
  1,451
  1,547
  1,647
  1,752
  1,860
  1,973
  2,091
Depreciation, amort., depletion, $m
  119
  136
  155
  176
  200
  226
  255
  286
  320
  356
  342
  382
  425
  470
  517
  566
  617
  671
  726
  784
  844
  906
  971
  1,039
  1,109
  1,182
  1,257
  1,336
  1,418
  1,504
Funds from operations, $m
  187
  227
  272
  324
  381
  444
  513
  588
  669
  755
  832
  929
  1,030
  1,137
  1,249
  1,366
  1,488
  1,615
  1,747
  1,884
  2,027
  2,175
  2,329
  2,489
  2,656
  2,829
  3,009
  3,197
  3,392
  3,595
Change in working capital, $m
  23
  27
  31
  35
  39
  43
  47
  51
  55
  59
  62
  66
  70
  73
  77
  80
  84
  87
  91
  94
  98
  102
  106
  110
  114
  119
  124
  129
  134
  139
Cash from operations, $m
  164
  200
  242
  289
  342
  401
  466
  537
  614
  696
  769
  862
  961
  1,064
  1,172
  1,286
  1,404
  1,528
  1,656
  1,790
  1,929
  2,073
  2,223
  2,379
  2,542
  2,710
  2,886
  3,068
  3,258
  3,456
Maintenance CAPEX, $m
  -52
  -67
  -83
  -102
  -123
  -147
  -173
  -202
  -233
  -267
  -303
  -342
  -382
  -425
  -470
  -517
  -566
  -617
  -671
  -726
  -784
  -844
  -906
  -971
  -1,039
  -1,109
  -1,182
  -1,257
  -1,336
  -1,418
New CAPEX, $m
  -142
  -164
  -189
  -213
  -239
  -264
  -288
  -313
  -337
  -360
  -383
  -405
  -427
  -449
  -470
  -491
  -513
  -534
  -556
  -578
  -601
  -624
  -649
  -674
  -701
  -729
  -758
  -789
  -821
  -855
Cash from investing activities, $m
  -194
  -231
  -272
  -315
  -362
  -411
  -461
  -515
  -570
  -627
  -686
  -747
  -809
  -874
  -940
  -1,008
  -1,079
  -1,151
  -1,227
  -1,304
  -1,385
  -1,468
  -1,555
  -1,645
  -1,740
  -1,838
  -1,940
  -2,046
  -2,157
  -2,273
Free cash flow, $m
  -30
  -31
  -30
  -26
  -19
  -9
  5
  22
  44
  69
  83
  115
  151
  190
  232
  278
  326
  377
  430
  486
  544
  605
  668
  734
  802
  873
  946
  1,022
  1,100
  1,182
Issuance/(repayment) of debt, $m
  144
  168
  193
  218
  244
  269
  295
  320
  344
  368
  391
  414
  437
  459
  480
  502
  524
  545
  568
  590
  614
  638
  663
  689
  716
  744
  774
  806
  839
  874
Issuance/(repurchase) of shares, $m
  56
  53
  47
  39
  27
  12
  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  
  200
  221
  240
  257
  271
  281
  295
  320
  344
  368
  391
  414
  437
  459
  480
  502
  524
  545
  568
  590
  614
  638
  663
  689
  716
  744
  774
  806
  839
  874
Total cash flow (excl. dividends), $m
  171
  190
  210
  231
  251
  272
  299
  342
  388
  437
  475
  530
  588
  649
  713
  780
  849
  922
  998
  1,076
  1,158
  1,243
  1,331
  1,423
  1,518
  1,617
  1,720
  1,828
  1,939
  2,056
Retained Cash Flow (-), $m
  -124
  -144
  -165
  -186
  -208
  -230
  -252
  -273
  -294
  -315
  -335
  -354
  -373
  -392
  -411
  -429
  -448
  -467
  -485
  -505
  -525
  -545
  -567
  -589
  -612
  -637
  -662
  -689
  -718
  -747
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
  4
  6
  7
  9
  11
  13
  15
  17
  20
  23
  26
  29
  33
  36
  40
  44
  49
  53
  58
  62
  67
  72
  78
  83
  89
  95
  101
  108
  115
  122
Cash available for distribution, $m
  47
  46
  45
  44
  43
  42
  47
  68
  93
  122
  140
  175
  214
  257
  302
  350
  402
  455
  512
  571
  633
  697
  764
  834
  906
  981
  1,058
  1,138
  1,222
  1,308
Discount rate, %
  5.80
  6.09
  6.39
  6.71
  7.05
  7.40
  7.77
  8.16
  8.57
  9.00
  9.45
  9.92
  10.42
  10.94
  11.48
  12.06
  12.66
  13.29
  13.96
  14.66
  15.39
  16.16
  16.97
  17.81
  18.71
  19.64
  20.62
  21.65
  22.74
  23.87
PV of cash for distribution, $m
  44
  41
  37
  34
  31
  27
  28
  37
  45
  51
  52
  56
  59
  60
  59
  57
  53
  48
  43
  37
  31
  26
  21
  16
  12
  9
  7
  5
  3
  2
Current shareholders' claim on cash, %
  96.3
  93.6
  91.7
  90.5
  89.8
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5
  89.5

Federal Signal Corporation designs, manufactures and supplies a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers. The Company's segments include the Environmental Solutions Group and the Safety and Security Systems Group. Its Environmental Solutions Group manufactures and supplies a range of street sweeper vehicles, sewer cleaner and vacuum loader trucks, hydro-excavation trucks and waterblasting equipment. The products are sold to both municipal and industrial customers under the Elgin, Vactor, Guzzler and Jetstream brand names. Safety and Security Systems is a manufacturer and supplier of systems and products that law enforcement, fire rescue, emergency medical services, campuses military facilities and industrial sites use to protect people and property. It offers systems for campus and community alerting, emergency vehicles, first responder interoperable communications and industrial communications, among others.

FINANCIAL RATIOS  of  Federal Signal (FSS)

Valuation Ratios
P/E Ratio 32.7
Price to Sales 2
Price to Book 3.7
Price to Tangible Book
Price to Cash Flow 57.6
Price to Free Cash Flow 75.8
Growth Rates
Sales Growth Rate -7.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -40%
Cap. Spend. - 3 Yr. Gr. Rate -12.9%
Financial Strength
Quick Ratio 51
Current Ratio 0
LT Debt to Equity 16%
Total Debt to Equity 16.2%
Interest Coverage 58
Management Effectiveness
Return On Assets 6.8%
Ret/ On Assets - 3 Yr. Avg. 8.9%
Return On Total Capital 9.7%
Ret/ On T. Cap. - 3 Yr. Avg. 13.1%
Return On Equity 11%
Return On Equity - 3 Yr. Avg. 15.1%
Asset Turnover 1.1
Profitability Ratios
Gross Margin 25.8%
Gross Margin - 3 Yr. Avg. 27.4%
EBITDA Margin 10.9%
EBITDA Margin - 3 Yr. Avg. 12.8%
Operating Margin 8.1%
Oper. Margin - 3 Yr. Avg. 11%
Pre-Tax Margin 8.1%
Pre-Tax Margin - 3 Yr. Avg. 10.6%
Net Profit Margin 6.2%
Net Profit Margin - 3 Yr. Avg. 7.6%
Effective Tax Rate 31.6%
Eff/ Tax Rate - 3 Yr. Avg. 31.1%
Payout Ratio 38.6%

FSS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FSS stock intrinsic value calculation we used $899 million for the last fiscal year's total revenue generated by Federal Signal. The default revenue input number comes from 2017 income statement of Federal Signal. 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 FSS stock valuation model: a) initial revenue growth rate of 26.9% 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 5.8%, whose default value for FSS is calculated based on our internal credit rating of Federal Signal, 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 Federal Signal.
    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 FSS stock the variable cost ratio is equal to 91.8%.

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 FSS 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 5.4% for Federal Signal.

Corporate tax rate of 27% is the nominal tax rate for Federal Signal. 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 FSS stock is equal to 0.5%.

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 FSS are equal to 58.3%.

Life of production assets of 10 years is the average useful life of capital assets used in Federal Signal 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 FSS is equal to 9.5%. 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 - $457 million for Federal Signal - 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 60 million for Federal Signal 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 Federal Signal at the current share price and the inputted number of shares is $1.5 billion.

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COMPANY NEWS

▶ General Electric (GE) Secures Order for 50 New Locomotives   [Jun-22-18 02:45PM  InvestorPlace]
▶ Federal Signal: 1Q Earnings Snapshot   [May-08-18 09:16AM  Associated Press]
▶ Newest Polaris Rangers come pre-kitted for fire, police and rescue buyers (slideshow)   [Apr-25-18 03:48PM  American City Business Journals]
▶ Federal Signal tops Street 4Q forecasts   [Feb-28-18 10:13AM  Associated Press]
▶ Federal Signal Sees Its Composite Rating Rise To 96   [Nov-03-17 03:00AM  Investor's Business Daily]
▶ Federal Signal Corporation to Host Earnings Call   [Nov-02-17 09:00AM  ACCESSWIRE]
▶ Federal Signal tops Street 3Q forecasts   [08:47AM  Associated Press]
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