Keurig Dr Pepper's estimated fair value is US$55.85 based on 2 Stage Free Cash Flow to Equity
Keurig Dr Pepper is estimated to be 41% undervalued based on current share price of US$32.78
Our fair value estimate is 51% higher than Keurig Dr Pepper's analyst price target of US$36.90
In this article we are going to estimate the intrinsic value of Keurig Dr Pepper Inc. (NASDAQ:KDP) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Is Keurig Dr Pepper Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$2.74b
US$3.05b
US$3.26b
US$3.25b
US$3.27b
US$3.30b
US$3.35b
US$3.41b
US$3.47b
US$3.55b
Growth Rate Estimate Source
Analyst x6
Analyst x3
Analyst x2
Analyst x2
Est @ 0.48%
Est @ 1.05%
Est @ 1.45%
Est @ 1.73%
Est @ 1.92%
Est @ 2.06%
Present Value ($, Millions) Discounted @ 6.2%
US$2.6k
US$2.7k
US$2.7k
US$2.6k
US$2.4k
US$2.3k
US$2.2k
US$2.1k
US$2.0k
US$1.9k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$24b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 6.2%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$95b÷ ( 1 + 6.2%)10= US$52b
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$76b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$32.8, the company appears quite undervalued at a 41% 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.
NasdaqGS:KDP Discounted Cash Flow July 3rd 2024
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Keurig Dr Pepper 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 6.2%, which is based on a levered beta of 0.829. 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 Keurig Dr Pepper
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings.
Balance sheet summary for KDP.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Beverage market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by cash flow.
Annual earnings are forecast to grow slower than the American market.
Is KDP well equipped to handle threats?
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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Keurig Dr Pepper, we've compiled three pertinent items you should further examine:
Risks: Case in point, we've spotted 3 warning signs for Keurig Dr Pepper you should be aware of, and 1 of them doesn't sit too well with us.
Future Earnings: How does KDP'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 NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要见解
基于两步自由现金流股权的估算值,Keurig Dr Pepper的估算公允价值为55.85美元。
基于当前股价32.78美元,Keurig Dr Pepper估算被低估了41%。
我们的公允价值估算比Keurig Dr Pepper的分析师价格目标36.9美元高出51%。
在本文中,我们将通过预期未来现金流并将其折算至今天的价值来估算Keurig Dr Pepper Inc.(纳斯达克股票代码:KDP)的内在价值。使用贴现现金流模型(DCF)完成这个过程。事实上,虽然可能看起来相当复杂,但实际上并没有那么困难。
上述计算非常依赖两个假设。一个是折现率,另一个是现金流。如果您不同意这些结果,请尝试自己计算并玩弄这些假设。DCF还不考虑行业的可能循环性或公司未来的资本需求,因此它不能全面了解公司的潜在表现。鉴于我们正在研究Keurig Dr Pepper作为潜在股东,因此使用股本成本作为贴现率,而不是考虑债务的资本成本(或加权平均资本成本,WACC)。在这个计算中,我们使用的是基于0.829的杠杆β的6.2%。Beta是股票相对于整个市场的波动性的一种度量。我们从全球可比公司的行业平均β中获取我们的β,其限制已加以限制在0.8至2.0之间,这是一个稳定业务的合理范围。
Keurig Dr Pepper SWOT分析
优势
去年盈利增长超过了行业平均水平。
债务被收益覆盖良好。
KDP资产负债表摘要
弱点
相对于饮料市场前25%的股息支付者, 股息较低。
机会
预计未来3年的年度收益将增长。
基于市盈率和预估公平价值,出现良好的价值。
威胁
运营现金流无法很好地覆盖债务。
股息不被现金流覆盖。
预计年度收益增长速度将慢于美国市场。
KDP是否准备好应对威胁?
展望未来:
尽管公司估值重要,但最好的方法是对一家公司进行透彻分析时不仅关注估值。它不可能使用DCF模型获得无懈可击的估值。相反,DCF模型的最佳用途是测试某些假设和理论,以查看它们是否会导致公司被低估或高估。例如,如果终端价值增长率稍微调整,它可能会极大地改变总体结果。我们能否算出该公司为何以低于内在价值的价格交易?针对Keurig Dr Pepper,我们收集了三个相关因素供您进一步验证:
风险:例如,我们在Keurig Dr Pepper中发现了3个警示信号,您应该意识到其中1个对我们来说不太合适。