What is QADA's Intrinsic value?

QAD Inc (QADA) Intrinsic Value Analysis

Executive Summary

As of May 25, 2025, QAD Inc's estimated intrinsic value ranges from $9.81 to $52.75 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $52.75 -39.8%
Discounted Cash Flow (5Y) $40.17 -54.2%
Dividend Discount Model (Multi-Stage) $32.79 -62.6%
Dividend Discount Model (Stable) $14.74 -83.2%
Earnings Power Value $9.81 -88.8%

Is QAD Inc (QADA) undervalued or overvalued?

With the current market price at $87.63, 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 QAD 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
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

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 3.2% 3.7%
Equity market risk premium 4.2% 5.2%
Adjusted beta 0.71 0.9
Cost of equity 6.2% 8.9%
Cost of debt 4.2% 4.5%
Tax rate 27.0% 27.0%
Debt/Equity ratio 0.01 0.01
After-tax WACC 6.2% 8.9%

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: 7.5% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $308 (FY01-2021) to $517 (FY01-2031)
  • Net profit margin expansion from 4% to 10%
  • Capital expenditures maintained at approximately 2% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $40 $708M 87.7%
10-Year Growth $53 $968M 77.0%
5-Year EBITDA $29 $483M 82.1%
10-Year EBITDA $37 $652M 65.9%

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: 84.1%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 7.5%
  • Long-term growth rate: 4.0%
  • Fair value: $32.79 (-62.6% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 8.9% (Low) to 6.2% (High)
  • Long-term growth rate: 3.0% (Low) to 5.0% (High)
  • Fair value range: $4 to $26
  • Selected fair value: $14.74 (-83.2% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $6M
Discount Rate (WACC) 8.9% - 6.2%
Enterprise Value $65M - $93M
Net Debt $(124)M
Equity Value $189M - $217M
Outstanding Shares 21M
Fair Value $9 - $10
Selected Fair Value $9.81

Key Financial Metrics

Metric Value
Market Capitalization $1815M
Enterprise Value $1691M
Trailing P/E 262.26
Forward P/E 135.33
Trailing EV/EBITDA 10.60
Current Dividend Yield 32.09%
Dividend Growth Rate (5Y) 2.19%
Debt-to-Equity Ratio 0.01

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) 30% $15.82
Discounted Cash Flow (5Y) 25% $10.04
Dividend Discount Model (Multi-Stage) 20% $6.56
Dividend Discount Model (Stable) 15% $2.21
Earnings Power Value 10% $0.98
Weighted Average 100% $35.62

Investment Conclusion

Based on our comprehensive valuation analysis, QAD Inc's weighted average intrinsic value is $35.62, which is approximately 59.4% below the current market price of $87.63.

Key investment considerations:

  • Strong projected earnings growth (4% to 10% margin)
  • Consistent cash flow generation
  • Conservative capital structure (Debt/Equity of 0.01)
  • Historical dividend growth of 2.19%

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