Key Insights
- Kronos Worldwide's estimated fair value is US$4.27 based on Dividend Discount Model
- Current share price of US$4.40 suggests Kronos Worldwide is potentially trading close to its fair value
- When compared to theindustry average discount of -44%, Kronos Worldwide's competitors seem to be trading at a greater premium to fair value
How far off is Kronos Worldwide, Inc. (NYSE:KRO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Method
We have to calculate the value of Kronos Worldwide slightly differently to other stocks because it is a chemicals company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.3%. We then discount this figure to today's value at a cost of equity of 7.8%. Compared to the current share price of US$4.4, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$0.2 / (7.8% – 3.3%)
= US$4.3
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Kronos Worldwide as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 0.991. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
View our latest analysis for Kronos Worldwide
SWOT Analysis for Kronos Worldwide
- Debt is well covered by .
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Chemicals market.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Significant insider buying over the past 3 months.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company is unprofitable.
Moving On:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Kronos Worldwide, we've compiled three essential factors you should further examine:
- Risks: For example, we've discovered 3 warning signs for Kronos Worldwide that you should be aware of before investing here.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for KRO's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.