Estimating The Intrinsic Value Of Ramaco Resources, Inc. (NASDAQ:METC)

Simply Wall St · 09/15/2023 10:19

Key Insights

  • The projected fair value for Ramaco Resources is US$7.54 based on Dividend Discount Model
  • With US$8.70 share price, Ramaco Resources appears to be trading close to its estimated fair value
  • Our fair value estimate is 17% lower than Ramaco Resources' analyst price target of US$9.06

How far off is Ramaco Resources, Inc. (NASDAQ:METC) 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 forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Ramaco Resources

The Model

We have to calculate the value of Ramaco Resources slightly differently to other stocks because it is a metals and mining 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. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. 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 2.2%. We then discount this figure to today's value at a cost of equity of 8.9%. Compared to the current share price of US$8.7, 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$0.5 / (8.9% – 2.2%)

= US$7.5

dcf
NasdaqGS:METC Discounted Cash Flow September 15th 2023

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Ramaco Resources 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 8.9%, which is based on a levered beta of 1.342. 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 Ramaco Resources

Strength
  • Debt is not viewed as a risk.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
  • Expensive based on P/E ratio and estimated fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • Annual revenue is forecast to grow faster than the American market.
Threat
  • Dividends are not covered by cash flow.
  • Annual earnings are forecast to decline for the next 3 years.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Ramaco Resources, we've put together three important aspects you should look at:

  1. Risks: Case in point, we've spotted 4 warning signs for Ramaco Resources you should be aware of, and 1 of them is a bit unpleasant.
  2. Future Earnings: How does METC'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 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.