Calculating The Fair Value Of Hudson Technologies, Inc. (NASDAQ:HDSN)

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27-04-2025

The projected fair value for Hudson Technologies is US$5.78 based on 2 Stage Free Cash Flow to Equity
Current share price of US$6.23 suggests Hudson Technologies is potentially trading close to its fair value
Analyst price target for HDSN is US$6.56, which is 14% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Hudson Technologies, Inc. (NASDAQ:HDSN) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$14.3m
US$13.5m
US$13.1m
US$12.9m
US$12.9m
US$13.0m
US$13.2m
US$13.4m
US$13.7m
US$14.0m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ -2.98%
Est @ -1.26%
Est @ -0.06%
Est @ 0.78%
Est @ 1.37%
Est @ 1.79%
Est @ 2.08%
Est @ 2.28%
Present Value ($, Millions) Discounted @ 7.2%
US$13.3
US$11.7
US$10.6
US$9.8
US$9.1
US$8.6
US$8.1
US$7.7
US$7.3
US$7.0
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$93m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$14m× (1 + 2.8%) ÷ (7.2%– 2.8%) = US$323m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$323m÷ ( 1 + 7.2%)10= US$161m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$254m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$6.2, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Hudson Technologies 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 7.2%, which is based on a levered beta of 1.027. 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.
Check out our latest analysis for Hudson Technologies
Strength
Currently debt free.
Weakness
Earnings declined over the past year.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow for the next 2 years.
Threat
Annual earnings are forecast to grow slower than the American market.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Hudson Technologies, we've put together three essential elements you should further research:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Hudson Technologies , and understanding this should be part of your investment process.
Future Earnings: How does HDSN'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.
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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.