Stock Analysis

Is MillerKnoll, Inc. (NASDAQ:MLKN) Trading At A 31% Discount?

NasdaqGS:MLKN
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Key Insights

  • The projected fair value for MillerKnoll is US$40.18 based on 2 Stage Free Cash Flow to Equity
  • MillerKnoll is estimated to be 31% undervalued based on current share price of US$27.82
  • The US$27.67 analyst price target for MLKN is 31% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of MillerKnoll, Inc. (NASDAQ:MLKN) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for MillerKnoll

The Calculation

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$209.9m US$204.7m US$202.8m US$202.8m US$204.2m US$206.5m US$209.5m US$213.1m US$217.0m US$221.3m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ -0.94% Est @ 0.01% Est @ 0.67% Est @ 1.14% Est @ 1.46% Est @ 1.69% Est @ 1.85% Est @ 1.96%
Present Value ($, Millions) Discounted @ 8.5% US$193 US$174 US$159 US$146 US$136 US$126 US$118 US$111 US$104 US$97.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.4b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 have used the 5-year average of the 10-year government bond yield (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 8.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$221m× (1 + 2.2%) ÷ (8.5%– 2.2%) = US$3.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.6b÷ ( 1 + 8.5%)10= US$1.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.0b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$27.8, the company appears quite good value at a 31% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGS:MLKN Discounted Cash Flow December 10th 2023

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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 MillerKnoll 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 8.5%, which is based on a levered beta of 1.259. 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.

SWOT Analysis for MillerKnoll

Strength
  • Debt is well covered by cash flow.
Weakness
  • Earnings declined over the past year.
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Commercial Services market.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Dividends are not covered by earnings.
  • Annual revenue is forecast to grow slower than the American market.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Can we work out why the company is trading at a discount to intrinsic value? For MillerKnoll, we've compiled three further items you should look at:

  1. Risks: We feel that you should assess the 4 warning signs for MillerKnoll (1 is a bit concerning!) we've flagged before making an investment in the company.
  2. Future Earnings: How does MLKN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.