Today we’re going to review one way to estimate the intrinsic value of Newell Brands Inc. (NASDAQ: NWL) by taking the company’s future cash flow forecasts and discounting them to today’s value. ‘hui. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We generally think of a business’s value as 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 analysis model.
Check out our latest review for Newell brands
The method
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 a lower growth stage. In the first step, we need to estimate the cash flow of the business over 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, and therefore the sum of those future cash flows is then discounted to today’s value. :
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | 828.5 million US dollars | US $ 954.4 million | 947.4 million US dollars | 948.1 million US dollars | US $ 954.2 million | US $ 964.1 million | US $ 976.8 million | US $ 991.5 million | US $ 1.01 billion | US $ 1.03 billion |
Source of estimated growth rate | Analyst x3 | Analyst x2 | East @ -0.73% | Is @ 0.08% | East @ 0.64% | East @ 1.04% | Est @ 1.31% | Is @ 1.51% | East @ 1.64% | East @ 1.74% |
Present value (in millions of dollars) discounted at 8.9% | US $ 761 | US $ 805 | US $ 733 | $ 674 | US $ 623 | 577 USD | US $ 537 | US $ 501 | US $ 467 | US $ 436 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 6.1 billion
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this ten-year period. 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 8.9%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 1.0 billion × (1 + 2.0%) ÷ (8.9% to 2.0%) = US $ 15 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 15 billion ÷ (1 + 8.9%)^{ten}= US $ 6.4 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. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of US $ 22.6, the company appears to be slightly undervalued at 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.
The hypotheses
We would like to stress that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. 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. Because we view Newell Brands 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 8.9%, which is based on a leveraged beta of 1.589. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Looking forward:
While valuing a business is important, it’s just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid 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 below intrinsic value? For Newell brands, there are three important things you should consider:
- Risks: For example, we have identified 1 warning sign for Newell brands that you should be aware of.
- Future benefits: How does NWL’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- 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. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions, do a search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St has no position in the mentioned stocks.
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