# Calculating The Intrinsic Value Of MRC Global Inc. (NYSE:MRC)

Today we will run through one way of estimating the intrinsic value of MRC Global Inc. (NYSE:MRC) by projecting its future cash flows and then discounting them to today’s value. I will be using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for MRC Global

### Is MRC Global fairly valued?

We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

#### 10-year free cash flow (FCF) forecast

 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Levered FCF (\$, Millions) US\$215.7m -US\$5.6m -US\$19.7m -US\$175.0k US\$14.2m US\$22.2m US\$31.1m US\$40.0m US\$48.3m US\$55.7m Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x4 Analyst x4 Analyst x2 Est @ 56.31% Est @ 40.08% Est @ 28.72% Est @ 20.77% Est @ 15.21% Present Value (\$, Millions) Discounted @ 12% US\$192 -US\$4.4 -US\$14.0 -US\$0.1 US\$8.0 US\$11.1 US\$13.8 US\$15.9 US\$17.1 US\$17.5

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US\$257m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 have used the 10-year government bond rate (2.2%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 12%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = US\$56m× (1 + 2.2%) ÷ 12%– 2.2%) = US\$567m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US\$567m÷ ( 1 + 12%)10= US\$178m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US\$435m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US\$5.2, the company appears about fair value at a 1.9% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.

### Important assumptions

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. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own 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 MRC Global 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 12%, which is based on a levered beta of 1.671. 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.

### Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” 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 MRC Global, We’ve put together three additional factors you should further research:

1. Risks: Be aware that MRC Global is showing 3 warning signs in our investment analysis , and 1 of those can’t be ignored…
2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for MRC’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. 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 NYSE every day. If you want to find the calculation for other stocks just search here.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

This article by Simply Wall St is general in nature. 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. Thank you for reading.