CENT is Undervalued

DCF Analysis of CENT suggests it is undervalued

Aug 18, 2021

Central Garden & Pet company- you may have never heard of it before just now. As the name suggests, their portfolio offers a wide variety of garden and pet products, with both segments surprisingly contributing nearly equal to their topline revenue. Their balance sheet suggests a stabilized, mature company and recent sell offs of small cap stocks has placed this company as a prime undervalued opportunity based on DCF modeling.
Before we break down the results, a quick background of DCF Tool can be found here.

Input Parameters

Our default analysis predicts a reasonable 3.6% growth rate, which l do believe is accurate considering their historical performance. Central has mature market segments with fairly saturated market presence, which suggests that they won’t see necessarily astounding growth. That said, a 3-4% growth rate that only slightly outpaces historical inflation provides a safe, realistic input value for their future.

As of this article, the WACC (discount rate) is calculated to be 7.3%. This is somewhat on the low side if you consider the typical discount rate to be somewhere around 8-11%. I will therefore edit this to a more modest 9% (remember, a higher discount rate results in a more conservative analysis).

For this model I have adjusted the Terminal Rate to 0%, as using the default 2% is substantially close to the normal growth rate and therefore significant to the assumptions of the model.

More Parameters

The default future flow projects approximately $131 million for 2021, which may be high if you exclude their 2018 record breaking year. Averaging their cash flows from 2015, 2016, 2017, 2019, and 2020 results in a more reasonable $101.3 million. For that reason, I will use this as the future year flow to build from.

All other parameters were left at their default if not noted.

Results

DCF analysis of Central Garden & Pet Co. (CENT) results

Based on these inputs, Central (CENT) is undervalued by 57% from its current stock price of approximately $45.

Safety Check

As a gut check using DCF Tool, I will remove the growth rate entirely and project the 2020 cash flow forever ($70 million). This essentially represents what the company is worth if it performed like it did in 2020 forever, which in Central’s case was coincidentally one of its worst years due to COVID (only making this safety that much more conservative). For Central, that still results in a massive 31% discount.

DCF analysis of Central Garden & Pet Co. (CENTT) results with conservative parameters

Simply put, with 0% growth and using Central’s worst performance in nearly 7 years, it is still trading at 31% below its current intrinsic value. Interestingly, this $65 is about where the stock peaked before the recent sell-off.

Considering all of the above analysis, Central presents strong evidence for it being an undervalued opportunity to explore.

Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article.