Shares of Hillenbrand, Inc. (NYSE:HI) have caught the attention of investors as analysts suggest that the company may be undervalued by as much as 44%. The projected fair value for Hillenbrand is estimated at $86.58, significantly higher than its current share price of $48.53.
Analysts have arrived at this valuation using a two-stage model, which takes into account different periods of growth rates for the company’s cash flows. The first stage is characterized by higher growth, followed by a lower growth phase in the second stage.
Estimating the next ten years of cash flows, analysts consider analyst estimates and previous free cash flow data. They assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will experience a gradual decline in their growth rate over time.
Discounting the sum of these future cash flows to arrive at a present value estimate, analysts derive a present value of 10-year cash flow (PVCF) of $2.5 billion.
The second stage involves calculating the terminal value, which represents the business’s cash flow after the first stage. To be conservative, analysts use a growth rate that does not exceed the country’s GDP growth rate. In this case, the 5-year average of the 10-year government bond yield (2.2%) is employed.
Discounting the future cash flows, analysts arrive at a present value of terminal value (PVTV) of $3.6 billion. The total equity value is then obtained by summing the present value of future cash flows and the present value of the terminal value, resulting in a value of $6.1 billion.
Dividing this equity value by the total number of shares outstanding, analysts determine an intrinsic value per share, which is significantly higher than the current stock price. At a discount of 44% to the current share price, Hillenbrand appears to offer good value for potential shareholders.
It is important to note that any valuation calculation is based on various assumptions and should be viewed as a rough estimate rather than an exact figure. However, the potential undervaluation of Hillenbrand has piqued the interest of investors, who may consider this investment opportunity based on the company’s strong earnings, forecasted growth, and recent insider buying.
SWOT Analysis: Assessing Hillenbrand’s Strengths, Weaknesses, Opportunities, and Threats
Investors considering Hillenbrand should also take into account the company’s strengths, weaknesses, opportunities, and threats. Conducting a SWOT analysis can provide valuable insights into the company’s current position and future prospects.
- Strengths: Hillenbrand has a strong ability to cover its debt with earnings.
- Weaknesses: Earnings have declined over the past year, and the dividend payout is low compared to other companies in the Machinery market.
- Opportunities: Annual earnings are forecasted to grow faster than the American market, and the company exhibits good value based on the P/E ratio and estimated fair value. Recent insider buying also indicates positive sentiment.
- Threats: Debt is not well covered by operating cash flow, and dividends are not currently covered by cash flow. Additionally, revenue growth is projected to be slower than 20% per year.
While the SWOT analysis provides a snapshot of Hillenbrand’s strengths, weaknesses, opportunities, and threats, investors should consider conducting further research and analysis before making any investment decisions. Evaluating the company’s financial indicators, market trends, and competitive landscape can provide a more comprehensive understanding of its potential performance.
Overall, Hillenbrand’s potential undervaluation, coupled with its strengths and opportunities, makes it an intriguing investment prospect for investors seeking value and growth in the machinery sector.