Are Investors Undervaluing FTAI Aviation Ltd. (NASDAQ:FTAI) By 44%?

Fortress Transportation & Infrastructure Investors LLC +0.69%

Fortress Transportation & Infrastructure Investors LLC

FTAI

68.54

+0.69%

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, FTAI Aviation fair value estimate is US$82.86
  • FTAI Aviation is estimated to be 44% undervalued based on current share price of US$46.76
  • The US$44.70 analyst price target for FTAI is 46% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of FTAI Aviation Ltd. (NASDAQ:FTAI) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for FTAI Aviation

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$5.00m US$316.4m US$415.1m US$490.0m US$555.2m US$610.7m US$657.4m US$697.0m US$731.0m US$760.8m
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Est @ 18.06% Est @ 13.30% Est @ 9.98% Est @ 7.65% Est @ 6.02% Est @ 4.88% Est @ 4.08%
Present Value ($, Millions) Discounted @ 8.7% US$4.6 US$268 US$323 US$351 US$366 US$370 US$367 US$358 US$345 US$331

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.1b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$761m× (1 + 2.2%) ÷ (8.7%– 2.2%) = US$12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 8.7%)10= US$5.2b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$8.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$46.8, the company appears quite good value at a 44% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGS:FTAI Discounted Cash Flow December 29th 2023

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 FTAI Aviation 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 8.7%, which is based on a levered beta of 1.294. 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.

SWOT Analysis for FTAI Aviation

Strength
  • No major strengths identified for FTAI.
Weakness
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Debt is not well covered by operating cash flow.
  • Dividends are not covered by earnings.
  • Annual revenue is forecast to grow slower than the American market.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For FTAI Aviation, we've compiled three relevant factors you should further research:

  1. Risks: Every company has them, and we've spotted 2 warning signs for FTAI Aviation you should know about.
  2. Future Earnings: How does FTAI's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

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