Intrinsic value of Federal Signal Corporation - FSS

Previous Close

$25.59

  Intrinsic Value

$60.87

stock screener

  Rating & Target

str. buy

+138%

Previous close

$25.59

 
Intrinsic value

$60.87

 
Up/down potential

+138%

 
Rating

str. buy

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 0001), $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
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  12.80
  12.02
  11.32
  10.69
  10.12
  9.61
  9.15
  8.73
  8.36
  8.02
  7.72
  7.45
  7.20
  6.98
  6.78
  6.61
  6.45
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
Revenue, $m
  1,230
  1,377
  1,533
  1,697
  1,869
  2,048
  2,236
  2,431
  2,634
  2,845
  3,065
  3,293
  3,530
  3,777
  4,033
  4,299
  4,577
  4,865
  5,165
  5,478
  5,804
  6,143
  6,498
  6,867
  7,254
  7,657
  8,078
  8,519
  8,980
  9,462
Variable operating expenses, $m
  874
  972
  1,077
  1,186
  1,301
  1,421
  1,546
  1,677
  1,812
  1,954
  2,049
  2,201
  2,360
  2,525
  2,696
  2,874
  3,059
  3,252
  3,453
  3,662
  3,880
  4,107
  4,344
  4,591
  4,849
  5,118
  5,400
  5,695
  6,003
  6,325
Fixed operating expenses, $m
  196
  201
  205
  209
  214
  219
  224
  229
  234
  239
  244
  249
  255
  260
  266
  272
  278
  284
  290
  297
  303
  310
  317
  324
  331
  338
  346
  353
  361
  369
Total operating expenses, $m
  1,070
  1,173
  1,282
  1,395
  1,515
  1,640
  1,770
  1,906
  2,046
  2,193
  2,293
  2,450
  2,615
  2,785
  2,962
  3,146
  3,337
  3,536
  3,743
  3,959
  4,183
  4,417
  4,661
  4,915
  5,180
  5,456
  5,746
  6,048
  6,364
  6,694
Operating income, $m
  160
  204
  252
  301
  354
  408
  466
  526
  588
  653
  772
  842
  916
  992
  1,071
  1,153
  1,239
  1,329
  1,422
  1,519
  1,621
  1,727
  1,837
  1,953
  2,074
  2,200
  2,333
  2,471
  2,616
  2,768
EBITDA, $m
  237
  284
  335
  388
  444
  502
  563
  627
  694
  763
  835
  910
  988
  1,069
  1,154
  1,241
  1,333
  1,428
  1,528
  1,632
  1,740
  1,853
  1,971
  2,094
  2,223
  2,357
  2,498
  2,646
  2,800
  2,962
Interest expense (income), $m
  1
  11
  15
  18
  22
  26
  30
  35
  39
  44
  49
  54
  60
  65
  71
  77
  83
  90
  97
  104
  111
  119
  127
  135
  143
  153
  162
  172
  182
  193
  204
Earnings before tax, $m
  148
  190
  233
  279
  327
  378
  431
  486
  544
  604
  718
  783
  850
  921
  994
  1,070
  1,150
  1,232
  1,318
  1,408
  1,502
  1,600
  1,703
  1,810
  1,921
  2,038
  2,161
  2,289
  2,423
  2,564
Tax expense, $m
  40
  51
  63
  75
  88
  102
  116
  131
  147
  163
  194
  211
  230
  249
  268
  289
  310
  333
  356
  380
  406
  432
  460
  489
  519
  550
  583
  618
  654
  692
Net income, $m
  108
  138
  170
  204
  239
  276
  315
  355
  397
  441
  524
  571
  621
  672
  726
  781
  839
  900
  962
  1,028
  1,097
  1,168
  1,243
  1,321
  1,403
  1,488
  1,577
  1,671
  1,769
  1,872

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
  1,154
  1,293
  1,440
  1,593
  1,755
  1,923
  2,099
  2,282
  2,473
  2,672
  2,878
  3,092
  3,315
  3,546
  3,787
  4,037
  4,297
  4,568
  4,850
  5,143
  5,449
  5,768
  6,101
  6,448
  6,811
  7,190
  7,585
  7,999
  8,432
  8,884
Adjusted assets (=assets-cash), $m
  1,154
  1,293
  1,440
  1,593
  1,755
  1,923
  2,099
  2,282
  2,473
  2,672
  2,878
  3,092
  3,315
  3,546
  3,787
  4,037
  4,297
  4,568
  4,850
  5,143
  5,449
  5,768
  6,101
  6,448
  6,811
  7,190
  7,585
  7,999
  8,432
  8,884
Revenue / Adjusted assets
  1.066
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
  1.065
Average production assets, $m
  468
  525
  584
  647
  712
  780
  852
  926
  1,004
  1,084
  1,168
  1,255
  1,345
  1,439
  1,537
  1,638
  1,744
  1,854
  1,968
  2,087
  2,211
  2,341
  2,476
  2,617
  2,764
  2,917
  3,078
  3,246
  3,421
  3,605
Working capital, $m
  150
  168
  187
  207
  228
  250
  273
  297
  321
  347
  374
  402
  431
  461
  492
  525
  558
  594
  630
  668
  708
  749
  793
  838
  885
  934
  986
  1,039
  1,096
  1,154
Total debt, $m
  273
  340
  410
  484
  562
  643
  728
  817
  908
  1,004
  1,103
  1,207
  1,314
  1,426
  1,542
  1,662
  1,788
  1,918
  2,054
  2,196
  2,343
  2,497
  2,657
  2,824
  2,999
  3,182
  3,372
  3,572
  3,780
  3,999
Total liabilities, $m
  556
  623
  694
  768
  846
  927
  1,012
  1,100
  1,192
  1,288
  1,387
  1,490
  1,598
  1,709
  1,825
  1,946
  2,071
  2,202
  2,338
  2,479
  2,627
  2,780
  2,941
  3,108
  3,283
  3,465
  3,656
  3,855
  4,064
  4,282
Total equity, $m
  598
  670
  746
  825
  909
  996
  1,087
  1,182
  1,281
  1,384
  1,491
  1,602
  1,717
  1,837
  1,962
  2,091
  2,226
  2,366
  2,512
  2,664
  2,823
  2,988
  3,160
  3,340
  3,528
  3,724
  3,929
  4,143
  4,368
  4,602
Total liabilities and equity, $m
  1,154
  1,293
  1,440
  1,593
  1,755
  1,923
  2,099
  2,282
  2,473
  2,672
  2,878
  3,092
  3,315
  3,546
  3,787
  4,037
  4,297
  4,568
  4,850
  5,143
  5,450
  5,768
  6,101
  6,448
  6,811
  7,189
  7,585
  7,998
  8,432
  8,884
Debt-to-equity ratio
  0.460
  0.510
  0.550
  0.590
  0.620
  0.650
  0.670
  0.690
  0.710
  0.730
  0.740
  0.750
  0.770
  0.780
  0.790
  0.790
  0.800
  0.810
  0.820
  0.820
  0.830
  0.840
  0.840
  0.850
  0.850
  0.850
  0.860
  0.860
  0.870
  0.870
Adjusted equity ratio
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518
  0.518

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  108
  138
  170
  204
  239
  276
  315
  355
  397
  441
  524
  571
  621
  672
  726
  781
  839
  900
  962
  1,028
  1,097
  1,168
  1,243
  1,321
  1,403
  1,488
  1,577
  1,671
  1,769
  1,872
Depreciation, amort., depletion, $m
  77
  80
  83
  87
  90
  94
  98
  102
  106
  110
  63
  67
  72
  77
  83
  88
  94
  100
  106
  112
  119
  126
  133
  141
  149
  157
  165
  174
  184
  194
Funds from operations, $m
  185
  218
  253
  290
  329
  370
  412
  457
  503
  551
  587
  639
  693
  750
  808
  869
  933
  999
  1,068
  1,140
  1,216
  1,294
  1,376
  1,462
  1,551
  1,645
  1,743
  1,845
  1,953
  2,065
Change in working capital, $m
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  31
  33
  34
  35
  37
  38
  40
  41
  43
  45
  47
  49
  51
  54
  56
  59
Cash from operations, $m
  168
  200
  234
  270
  308
  348
  389
  433
  478
  525
  560
  611
  664
  719
  777
  837
  899
  964
  1,032
  1,102
  1,176
  1,253
  1,333
  1,417
  1,504
  1,596
  1,691
  1,792
  1,897
  2,007
Maintenance CAPEX, $m
  -22
  -25
  -28
  -31
  -35
  -38
  -42
  -46
  -50
  -54
  -58
  -63
  -67
  -72
  -77
  -83
  -88
  -94
  -100
  -106
  -112
  -119
  -126
  -133
  -141
  -149
  -157
  -165
  -174
  -184
New CAPEX, $m
  -54
  -56
  -59
  -62
  -65
  -68
  -71
  -74
  -77
  -81
  -84
  -87
  -90
  -94
  -98
  -102
  -106
  -110
  -114
  -119
  -124
  -129
  -135
  -141
  -147
  -154
  -161
  -168
  -176
  -184
Cash from investing activities, $m
  -76
  -81
  -87
  -93
  -100
  -106
  -113
  -120
  -127
  -135
  -142
  -150
  -157
  -166
  -175
  -185
  -194
  -204
  -214
  -225
  -236
  -248
  -261
  -274
  -288
  -303
  -318
  -333
  -350
  -368
Free cash flow, $m
  92
  119
  147
  177
  208
  241
  276
  313
  351
  391
  418
  461
  506
  553
  602
  653
  705
  760
  818
  877
  939
  1,004
  1,072
  1,143
  1,216
  1,293
  1,374
  1,458
  1,547
  1,639
Issuance/(repayment) of debt, $m
  63
  67
  71
  74
  78
  81
  85
  88
  92
  96
  99
  103
  107
  112
  116
  121
  125
  131
  136
  142
  147
  154
  160
  167
  175
  183
  191
  199
  209
  218
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
Cash from financing (excl. dividends), $m  
  63
  67
  71
  74
  78
  81
  85
  88
  92
  96
  99
  103
  107
  112
  116
  121
  125
  131
  136
  142
  147
  154
  160
  167
  175
  183
  191
  199
  209
  218
Total cash flow (excl. dividends), $m
  155
  186
  217
  251
  286
  322
  361
  401
  443
  486
  517
  565
  614
  665
  718
  773
  831
  891
  953
  1,019
  1,087
  1,158
  1,232
  1,310
  1,391
  1,476
  1,565
  1,658
  1,755
  1,857
Retained Cash Flow (-), $m
  -68
  -72
  -76
  -80
  -84
  -87
  -91
  -95
  -99
  -103
  -107
  -111
  -115
  -120
  -125
  -130
  -135
  -140
  -146
  -152
  -158
  -165
  -172
  -180
  -188
  -196
  -205
  -214
  -224
  -234
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
  87
  114
  142
  171
  202
  235
  270
  306
  344
  383
  411
  454
  498
  545
  593
  644
  696
  751
  807
  867
  928
  993
  1,060
  1,130
  1,203
  1,280
  1,360
  1,443
  1,531
  1,623
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
  83
  104
  123
  141
  157
  171
  182
  191
  198
  201
  195
  194
  189
  183
  174
  164
  151
  138
  124
  110
  96
  82
  69
  58
  47
  37
  29
  22
  17
  12
Current shareholders' claim on cash, %
  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

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 Corporation (FSS)

Valuation Ratios
P/E Ratio 34.7
Price to Sales 2.2
Price to Book 3.9
Price to Tangible Book
Price to Cash Flow 61
Price to Free Cash Flow 80.3
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 $1090 million for the last fiscal year's total revenue generated by Federal Signal Corporation. The default revenue input number comes from 0001 income statement of Federal Signal Corporation. 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 12.8% 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 FSS is calculated based on our internal credit rating of Federal Signal Corporation, 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 Corporation.
    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 71.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $192 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 Corporation.

Corporate tax rate of 27% is the nominal tax rate for Federal Signal Corporation. 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%.

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 38.1%.

Life of production assets of 18.6 years is the average useful life of capital assets used in Federal Signal Corporation 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 12.2%. 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 - $530.1 million for Federal Signal Corporation - 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 60.294 million for Federal Signal Corporation 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 Corporation at the current share price and the inputted number of shares is $1.5 billion.

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