Are Investors Undervaluing National Beverage Corp. (NASDAQ: FIZZ) by 23%?
In this article, we will estimate the intrinsic value of National Beverage Corp. (NASDAQ: FIZZ) by estimating the company’s future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are easy enough to follow.
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
Step by step in the calculation
We are going to use a two-step DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of these future cash flows is then discounted to present value:
10-year Free Cash Flow (FCF) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | $ 167.3 million | 172.8 million USD | $ 192.4 million | $ 199.8 million | $ 217.3 million | $ 229.6 million | $ 240.0 million | $ 249.1 million | $ 257.2 million | $ 264.6 million |
Source of estimated growth rate | Analyst x1 | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Is 5.64% | Is 4.55% | Is 3.78% | Is at 3.24% | Is 2.87% |
Present value ($, millions) discounted at 5.8% | US $ 158 | US $ 154 | US $ 163 | 160 USD | US $ 164 | US $ 164 | US $ 162 | US $ 159 | US $ 155 | US $ 151 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 1.6 billion USD
The second stage is also known as terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 5.8%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 265 million × (1 + 2.0%) ÷ (5.8% – 2.0%) = $ 7.1 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $ 7.1 billion ÷ (1 + 5.8%)^{ten}= 4.1 billion USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 5.7 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of US $ 47.0, the company appears a bit undervalued with a 23% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
NasdaqGS: FIZZ Discounted Cash Flow May 26, 2021
Important assumptions
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view National Beverage 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 takes into account debt. In this calculation, we used 5.8%, which is based on a leverage beta of 0.800. Beta is a measure of the volatility of a stock, relative 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.
Looking forward:
While a business valuation is important, ideally it won’t be the only analysis you review for a business. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is lower than intrinsic value? For National Beverage, we’ve rounded up three other factors you should dig deeper into:
- Financial health: Does FIZZ have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future income: How does FIZZ’s growth rate compare to its peers and to the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality inventory to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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