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- NYSE:TAP
Are Investors Undervaluing Molson Coors Beverage Company (NYSE:TAP) By 46%?
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Molson Coors Beverage fair value estimate is US$109
- Molson Coors Beverage is estimated to be 46% undervalued based on current share price of US$58.20
- The US$67.42 analyst price target for TAP is 38% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Molson Coors Beverage Company (NYSE:TAP) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Molson Coors Beverage
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$1.22b | US$1.18b | US$1.17b | US$1.17b | US$1.18b | US$1.19b | US$1.21b | US$1.23b | US$1.25b | US$1.27b |
Growth Rate Estimate Source | Analyst x4 | Analyst x3 | Est @ -1.02% | Est @ -0.07% | Est @ 0.60% | Est @ 1.06% | Est @ 1.39% | Est @ 1.62% | Est @ 1.78% | Est @ 1.89% |
Present Value ($, Millions) Discounted @ 6.7% | US$1.1k | US$1.0k | US$965 | US$904 | US$852 | US$807 | US$767 | US$731 | US$697 | US$665 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$8.6b
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 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 6.7%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$1.3b× (1 + 2.2%) ÷ (6.7%– 2.2%) = US$29b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$29b÷ ( 1 + 6.7%)10= US$15b
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$24b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$58.2, the company appears quite good value at a 46% 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.
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 Molson Coors Beverage 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 6.7%, which is based on a levered beta of 0.910. 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 Molson Coors Beverage
- Debt is well covered by earnings and cashflows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Beverage market.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/S ratio and estimated fair value.
- Dividends are not covered by earnings.
- Annual revenue is forecast to grow slower than the American market.
Moving On:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Why is the intrinsic value higher than the current share price? For Molson Coors Beverage, we've put together three further aspects you should further examine:
- Risks: Be aware that Molson Coors Beverage is showing 4 warning signs in our investment analysis , you should know about...
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TAP's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- 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.
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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.
About NYSE:TAP
Molson Coors Beverage
Manufactures, markets, and sells beer and other malt beverage products under various brands in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
Undervalued with solid track record and pays a dividend.