How far is Marie Brizard Wine & Spirits SA (EPA: MBWS) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking the company’s future cash flow forecast and discounting it to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.
Discover our latest analysis for Marie Brizard Wine & Spirits
What is the estimated valuation?
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
|Leverage FCF (€, Millions)||€ 2.50m||€ 4.40m||€ 5.97 million||7.46 million euros||8.77 M €||€ 9.87m||€ 10.7m||€ 11.4m||€ 11.9m||€ 12.3m|
|Source of growth rate estimate||Analyst x1||Analyst x1||East @ 35.6%||Est @ 25.03%||Est @ 17.63%||Is 12.45%||Est @ 8.82%||East @ 6.28%||Is 4.51%||East @ 3.26%|
|Present value (€, Millions) discounted @ 5.1%||€ 2.4||€ 4.0||€ 5.1||€ 6.1||€ 6.8||€ 7.3||€ 7.6||€ 7.7||€ 7.6||€ 7.5|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 62 M €
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.4%. We discount the terminal cash flows to their present value at a cost of equity of 5.1%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = € 12m × (1 + 0.4%) ÷ (5.1% – 0.4%) = € 261m
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 261m ÷ (1 + 5.1%)ten= 158 M €
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is € 220m. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current price of 1.5 €, the company appears to be slightly undervalued with a discount of 23% compared to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Marie Brizard Wine & Spirits as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 5.1%, which is based on a leveraged beta of 0.912. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Can we understand why the company trades at a discount to its intrinsic value? For Marie Brizard Wine & Spirits, we have compiled three important elements on which you should deepen your research:
- Risks: Concrete example, we have spotted 1 warning sign for Marie Brizard Wines & Spirits you must be aware.
- Future benefits: How does MBWS ‘growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what else you might be missing!
PS. Simply Wall St updates its DCF calculation for every French stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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