Free Cash Flow Valuation

Pro Forma

Seen in the image below, a Pro Forma analysis was done to predict changes in growth rates, COGS rates, SG&A changes, and change in NOA; estimations were made on a 10-year horizon, from fiscal year 2022 up to 2032. From years 2022 to 2024, Factset and Valueline provided estimations of growth rates and forecasts for COGS. For the following eight years after, the growth rate was calculated according to the previous year and the predicted long term growth rate, estimated at 1%. This value usually falls anywhere between 1-5%, and even though Denny's is projecting relatively high growth rates for the coming years, this is mainly due to the opening of so many new franchises; it is still a company in the restaurant industry, so it cannot sustain such extreme growth long term. The given values from 2022-2024 for COGS% are simply the average of the percentages predicted by both Factset and Valueline. The following years display a consistent rate of 62.24%, the rough average from the rates of 2022-2024. The constant rate of 14.53% for change in SG&A was calculated as the average of a vertical analysis from fiscal years 2018-2022. The constant rate of -9.37% change in NOA was calculated as the average of a vertical analysis from 2020 to 2021 of change in FCF resulting from a decrease in NOA, as well as the change in FCF from change in depreciation/capital expenditures.

Income Statement Prediction

To calculate the future forecast of the income statement, the growth, COGS, SG&A, and NOA changing rates calculated above were use according to values from current income statements. Total Revenue was calculated by taking the value of the previous year and multiplying by 1 plus the yearly growth rate; for 2023, the first year to calculate, this was taking the stated revenue from 2022, $491, and multiplying by 1.1432, to get a value of $523 for 2023. This was repeated until 2032. Cost of goods sold was calculated next using the same method, utilizing the predicted change in COGS. The gross profit was then calculate for the ten years by subtracting COGS from total revenue, and is noticeably increasing in the time period shown; 2022 had a gross profit of $185, while 2032 is predicted to have a profit of $529, a $344 increase (in millions). Selling General & Administrative Expenses were forecasted in the same way, increasing a total of roughly $150 from 2022 to 2032. The final Operating Income was simply calculated by subtracting all other operating expenses (SG&A) from the gross profit. In 2032 Operating Income is predicted to be $283, an increase of roughly $200; a rather large jump. Overall, this indicates a period of predicted positive growth for Denny's, as their revenue is growing at a greater pace than their expenses are.

Free Cash Flow Model Totals

The Total Free Cash Flow was calculated using results from both FCF Model One and Two combined. Model One determined the EBIT, taxes at the statutory rate, and changes in Net Operating Assets. Model Two accounted for the taxes at the statutory rate, but also calculated depreciation and amortization, investment in working capital, and capital expenditures. These values fed the rates calculated in the Pro Forma, which then predicted the values for EBIT and change in NOA, determining the Total Free Cash Flow for the ten year predicted time period. EBIT (for the most part) is increasing steadily, with noticeably large jump in 2024. Taxes rose at a relatively steady rate, ending in 2032 at $13 higher than 2022. NOA became increasingly negative over the time period, beginning in 2022 at $-46 and ending in 2032 at $-131. The FCF was calculated as a sum of the NOPAT and the change in NOA, and increased every year with the final estimate at $133 in 2032, an increase of $109 in the ten year period. After determining all future free cash flows, the terminal value was calculated, describing the present value of all the future cash flows of Denny's considering the expected constant future growth rate. This value was determined to be $1,634, which summed with the free cash flow for 2031 equals the Total Free Cash Flow. By 2031, Denny's Corporation (according to its terminal value and long term growth rate) should be worth $1,766 (millions).

Value Per Share

The goal of all of the previous calculations to determine free cash flows has been to calculate a final Value per Share for Denny's. To begin estimations for this final value, overall enterprise value was calculated by the net present value of the WACC (9.16%), as well as the sum of the total free cash flows from 2022 to 2031, which created an enterprise value of $1,115. Excess assets, including cash, were subtracted from the enterprise value, and were taken from the NOA calculations in the free cash flow. Debt was also subtracted from the enterprise value, found in the cost of capital calculations, and includes the LTD (including leases and the current portion); after both these calculations, a value of equity was determined to be $966. Dividing this value by the number of shares outstanding, found on Valueline reports, determined the final Value per Share to be $15.65. However, this leads me to believe that Denny's is undervalued, as its most recent Valueline report, published 11/18/2022, states that the price is equal to $11.90. I believe the difference between the value that the market gives, of $11.90, is below my Free Cash Flow estimation mainly because it does not consider the change in NOA caused by Denny's opening of so many new franchises in the past few years; this increases the value of the company.