What is FARO's Intrinsic value?

FARO Technologies Inc (FARO) Intrinsic Value Analysis

Executive Summary

As of May 22, 2025, FARO Technologies Inc's estimated intrinsic value ranges from $7.77 to $14.07 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $10.19 -75.8%
Discounted Cash Flow (5Y) $7.77 -81.5%
Dividend Discount Model (Multi-Stage) $14.07 -66.5%

Is FARO Technologies Inc (FARO) undervalued or overvalued?

With the current market price at $42.05, the stock appears to be significantly overvalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate FARO Technologies Inc's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 1.05 1.11
Cost of equity 8.7% 11.1%
Cost of debt 12.4% 257.9%
Tax rate 26.2% 27.0%
Debt/Equity ratio 0.09 0.09
After-tax WACC 8.7% 25.2%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 17.0% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $342 (FY12-2024) to $523 (FY12-2034)
  • Net profit margin expansion from -3% to 9%
  • Capital expenditures maintained at approximately 4% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $8 $131M 62.8%
10-Year Growth $10 $178M 38.8%
5-Year EBITDA $21 $387M 87.4%
10-Year EBITDA $19 $342M 68.3%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 0.0%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 9.9%
  • Long-term growth rate: 4.0%
  • Fair value: $14.07 (-66.5% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 11.1% (Low) to 8.7% (High)
  • Long-term growth rate: 3.0% (Low) to 5.0% (High)
  • Fair value range: $(4) to $(11)
  • Selected fair value: $-7.77 (-118.5% from current price)

Key Financial Metrics

Metric Value
Market Capitalization $809M
Enterprise Value $790M
Trailing P/E 0.00
Forward P/E 153.56
Trailing EV/EBITDA 14.05
Current Dividend Yield 0.00%
Dividend Growth Rate (5Y) 0.00%
Debt-to-Equity Ratio 0.09

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 40% $3.06
Discounted Cash Flow (5Y) 33% $1.94
Dividend Discount Model (Multi-Stage) 27% $2.81
Weighted Average 100% $10.42

Investment Conclusion

Based on our comprehensive valuation analysis, FARO Technologies Inc's weighted average intrinsic value is $10.42, which is approximately 75.2% below the current market price of $42.05.

Key investment considerations:

  • Strong projected earnings growth (-3% to 9% margin)
  • Consistent cash flow generation
  • Conservative capital structure (Debt/Equity of 0.09)

Given these factors, we believe FARO Technologies Inc is currently significantly overvalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.