Stock Analysis
Key Insights
- Westrock Coffee's estimated fair value is US$11.89 based on 2 Stage Free Cash Flow to Equity
- Westrock Coffee's US$9.90 share price indicates it is trading at similar levels as its fair value estimate
- The US$12.75 analyst price target for WEST is 7.3% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Westrock Coffee Company (NASDAQ:WEST) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Westrock Coffee
Step By Step Through The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Levered FCF ($, Millions) | -US$132.3m | US$18.4m | US$25.4m | US$32.4m | US$38.9m | US$44.6m | US$49.6m | US$53.7m | US$57.3m | US$60.3m |
| Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ 38.28% | Est @ 27.51% | Est @ 19.97% | Est @ 14.69% | Est @ 11.00% | Est @ 8.41% | Est @ 6.60% | Est @ 5.34% |
| Present Value ($, Millions) Discounted @ 6.1% | -US$125 | US$16.4 | US$21.3 | US$25.6 | US$29.0 | US$31.4 | US$32.8 | US$33.6 | US$33.7 | US$33.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$133m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 6.1%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$60m× (1 + 2.4%) ÷ (6.1%– 2.4%) = US$1.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.7b÷ ( 1 + 6.1%)10= US$932m
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$1.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$9.9, the company appears about fair value at a 17% 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Westrock Coffee 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 6.1%, which is based on a levered beta of 0.800. 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 Westrock Coffee
- Debt is well covered by earnings.
- Shareholders have been diluted in the past year.
- Forecast to reduce losses next year.
- Good value based on P/S ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
- Not expected to become profitable over the next 3 years.
Looking Ahead:
Although the valuation of a company is important, it 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Westrock Coffee, we've compiled three additional factors you should further research:
- Risks: Every company has them, and we've spotted 3 warning signs for Westrock Coffee (of which 1 makes us a bit uncomfortable!) you should know about.
- Future Earnings: How does WEST'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.
- 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 NASDAQGM every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Westrock Coffee is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
About NasdaqGM:WEST
Westrock Coffee
Westrock Coffee Company, LLC operates as an integrated coffee, tea, flavors, extracts, and ingredients solutions provider in the United States and internationally.
Good value with limited growth.
