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An Intrinsic Calculation For Berry Global Group, Inc. (NYSE:BERY) Suggests It's 45% Undervalued
Key Insights
- The projected fair value for Berry Global Group is US$105 based on 2 Stage Free Cash Flow to Equity
- Berry Global Group's US$57.62 share price signals that it might be 45% undervalued
- Our fair value estimate is 31% lower than Berry Global Group's analyst price target of US$72.38
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Berry Global Group, Inc. (NYSE:BERY) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Berry Global Group
Crunching The Numbers
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF ($, Millions) | US$848.1m | US$987.4m | US$1.09b | US$1.06b | US$1.05b | US$1.05b | US$1.05b | US$1.06b | US$1.08b | US$1.09b |
Growth Rate Estimate Source | Analyst x8 | Analyst x6 | Analyst x3 | Analyst x1 | Est @ -1.00% | Est @ -0.08% | Est @ 0.56% | Est @ 1.02% | Est @ 1.33% | Est @ 1.55% |
Present Value ($, Millions) Discounted @ 9.3% | US$776 | US$826 | US$830 | US$740 | US$670 | US$612 | US$563 | US$520 | US$482 | US$448 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$6.5b
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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$1.1b× (1 + 2.1%) ÷ (9.3%– 2.1%) = US$15b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$15b÷ ( 1 + 9.3%)10= US$6.3b
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$13b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$57.6, the company appears quite undervalued at a 45% 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
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 Berry Global Group 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 9.3%, which is based on a levered beta of 1.226. 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 Berry Global Group
- Debt is well covered by earnings.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year underperformed the Packaging industry.
- Dividend is low compared to the top 25% of dividend payers in the Packaging market.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Annual earnings are 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. 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. Why is the intrinsic value higher than the current share price? For Berry Global Group, we've compiled three further factors you should assess:
- Risks: We feel that you should assess the 2 warning signs for Berry Global Group (1 doesn't sit too well with us!) we've flagged before making an investment in the company.
- Future Earnings: How does BERY'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. 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.
Valuation is complex, but we're here to simplify it.
Discover if Berry Global Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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 NYSE:BERY
Berry Global Group
Manufactures and supplies non-woven, flexible, and rigid products in consumer and industrial end markets in the United States, Canada, Europe, and internationally.
Undervalued with mediocre balance sheet.