Does Bunge Limited (NYSE: BG) trade at a 21% discount?
In this article, we’ll estimate the intrinsic value of Bunge Limited (NYSE: BG) by taking expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. 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 stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 1.49 billion||US $ 983.5 million||US $ 778.0 million||US $ 855.0 million||US $ 737.5 million||US $ 671.0 million||US $ 632.6 million||US $ 611.1 million||US $ 600.1 million||US $ 596.2 million|
|Source of estimated growth rate||Analyst x3||Analyst x2||Analyst x1||Analyst x1||Is @ -13.74%||Is @ -9.02%||Is @ -5.72%||Is @ -3.41%||Is @ -1.79%||East @ -0.65%|
|Present value (in millions of dollars) discounted at 6.5%||US $ 1.4k||US $ 868||$ 645||US $ 665||US $ 539||US $ 461||US $ 408||US $ 370||US $ 342||$ 319|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 6.0 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 6.5%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 596 million × (1 + 2.0%) ÷ (6.5% to 2.0%) = US $ 14 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 14 billion ÷ (1 + 6.5%)ten= US $ 7.3 billion
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is US $ 13 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of US $ 73.8, the company appears to be slightly undervalued at a 21% 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.
NYSE: BG Discounted Cash Flow July 20, 2021
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. 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 full picture of a company’s potential performance. Since we view Bunge 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 debt into account. In this calculation, we used 6.5%, which is based on a leveraged beta of 0.948. 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 from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Why is intrinsic value greater than the current share price? For Bunge, we’ve compiled three relevant aspects that you should explore:
- Risks: Be aware that Bunge shows 4 warning signs in our investment analysis , and 3 of them make us uncomfortable …
- Management: Have insiders increased their stocks to take advantage of market sentiment about BG’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks 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 shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in the mentioned stocks.
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