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
主要見解
基於兩步自由現金流股權的估算值,Keurig Dr Pepper的估算公允價值爲55.85美元。
基於當前股價32.78美元,Keurig Dr Pepper估算被低估了41%。
我們的公允價值估計比keurig dr pepper分析師的目標價36.90美元高出51%。
在本文中,我們將通過預期未來現金流並將其折算至今天的價值來估算Keurig Dr Pepper Inc.(納斯達克股票代碼:KDP)的內在價值。使用貼現現金流模型(DCF)完成這個過程。事實上,雖然可能看起來相當複雜,但實際上並沒有那麼困難。
上述計算非常依賴兩個假設。一個是折現率,另一個是現金流。如果您不同意這些結果,請嘗試自己計算並玩弄這些假設。DCF還不考慮行業的可能循環性或公司未來的資本需求,因此它不能全面了解公司的潛在表現。鑑於我們正在研究Keurig Dr Pepper作爲潛在股東,因此使用股本成本作爲貼現率,而不是考慮債務的資本成本(或加權平均資本成本,WACC)。在這個計算中,我們使用的是基於0.829的槓桿β的6.2%。Beta是股票相對於整個市場的波動性的一種度量。我們從全球可比公司的行業平均β中獲取我們的β,其限制已加以限制在0.8至2.0之間,這是一個穩定業務的合理範圍。
Keurig Dr Pepper SWOT分析
優勢
去年盈利增長超過了行業平均水平。
債務被收益覆蓋良好。
KDP資產負債表摘要
弱點
相對於飲料市場前25%的股息支付者, 股息較低。
機會
預計未來3年的年度收益將增長。
基於市盈率和預估公平價值,出現良好的價值。
威脅
運營現金流無法很好地覆蓋債務。
股息不被現金流覆蓋。
預計年度收益增長速度將慢於美國市場。
KDP是否準備好應對威脅?
展望未來:
儘管公司估值重要,但最好的方法是對一家公司進行透徹分析時不僅關注估值。它不可能使用DCF模型獲得無懈可擊的估值。相反,DCF模型的最佳用途是測試某些假設和理論,以查看它們是否會導致公司被低估或高估。例如,如果終端價值增長率稍微調整,它可能會極大地改變總體結果。我們能否算出該公司爲何以低於內在價值的價格交易?針對Keurig Dr Pepper,我們收集了三個相關因素供您進一步驗證:
風險:例如,我們已經發現了3個keurig dr pepper的警告信號,你應該注意,其中有一個讓我們感到不太舒服。