An Intrinsic Value Calculation For MPLX LP (MPLX) Shows It’s 38.55% Undervalued

How far off is MPLX LP (NYSE:MPLX) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not November 2017 then I highly recommend you check out the latest calculation for MPLX by following the link below. Check out our latest analysis for MPLX

The model

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. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2017 2018 2019 2020 2021
Levered FCF (USD, Millions) $-602.00 $571.00 $2,387.00 $2,542.00 $2,622.00
Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Analyst x1
Present Value Discounted @ 11.1% $-541.83 $462.57 $1,740.46 $1,668.24 $1,548.76

Present Value of 5-year Cash Flow (PVCF)= $4,878

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.5%. We discount this to today’s value at a cost of equity of 11.1%.

Terminal Value (TV) = FCF2021 × (1 + g) ÷ (r – g) = $2,622 × (1 + 2.5%) ÷ (11.1% – 2.5%) = $31,119

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = $31,119 / ( 1 + 11.1%)5 = $18,381

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $23,259. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $56.00, which, compared to the current share price of $34.41, we see that MPLX is quite good value at a 38.55% discount to what it is available for right now.

NYSE:MPLX Intrinsic Value Nov 17th 17
NYSE:MPLX Intrinsic Value Nov 17th 17

Important assumptions

Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at MPLX as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.1%, which is based on a levered beta of 1.147. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For MPLX, I’ve compiled three pertinent factors you should further research:

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.