Estimating The Fair Value Of Maui Land & Pineapple Company, Inc. (NYSE:MLP)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Maui Land & Pineapple Company fair value estimate is US$15.56
• Current share price of US$12.49 suggests Maui Land & Pineapple Company is potentially trading close to its fair value
• Maui Land & Pineapple Company's peers are currently trading at a premium of 72% on average

In this article we are going to estimate the intrinsic value of Maui Land & Pineapple Company, Inc. (NYSE:MLP) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Maui Land & Pineapple Company

Is Maui Land & Pineapple Company 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. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	US$8.74m	US$11.5m	US$14.1m	US$16.5m	US$18.5m	US$20.2m	US$21.6m	US$22.8m	US$23.8m	US$24.7m
Growth Rate Estimate Source	Est @ 44.34%	Est @ 31.66%	Est @ 22.78%	Est @ 16.57%	Est @ 12.22%	Est @ 9.17%	Est @ 7.04%	Est @ 5.55%	Est @ 4.51%	Est @ 3.78%
Present Value ($, Millions) Discounted @ 8.1%	US$8.1	US$9.8	US$11.2	US$12.1	US$12.5	US$12.6	US$12.5	US$12.2	US$11.8	US$11.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$114m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.1%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$25m× (1 + 2.1%) ÷ (8.1%– 2.1%) = US$417m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$417m÷ ( 1 + 8.1%)¹⁰= US$191m

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$305m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$12.5, the company appears about fair value at a 20% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The 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 Maui Land & Pineapple Company 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 8.1%, which is based on a levered beta of 1.019. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. 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 Maui Land & Pineapple Company, we've compiled three relevant items you should further examine:

1. Risks: For example, we've discovered 1 warning sign for Maui Land & Pineapple Company that you should be aware of before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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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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.