Estimating The Intrinsic Value Of MasterBrand, Inc. (NYSE:MBC)
Key Insights
- MasterBrand's estimated fair value is US$12.90 based on 2 Stage Free Cash Flow to Equity
- With US$11.50 share price, MasterBrand appears to be trading close to its estimated fair value
- Peers of MasterBrand are currently trading on average at a 13% premium
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of MasterBrand, Inc. (NYSE:MBC) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF ($, Millions) | US$142.6m | US$135.7m | US$132.5m | US$131.6m | US$132.2m | US$134.0m | US$136.5m | US$139.7m | US$143.3m | US$147.3m |
| Growth Rate Estimate Source | Est @ -8.25% | Est @ -4.80% | Est @ -2.38% | Est @ -0.69% | Est @ 0.50% | Est @ 1.32% | Est @ 1.91% | Est @ 2.31% | Est @ 2.60% | Est @ 2.80% |
| Present Value ($, Millions) Discounted @ 10% | US$129 | US$111 | US$98.7 | US$88.8 | US$80.9 | US$74.3 | US$68.6 | US$63.6 | US$59.2 | US$55.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$830m
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 3.3%. We discount the terminal cash flows to today's value at a cost of equity of 10%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$147m× (1 + 3.3%) ÷ (10%– 3.3%) = US$2.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.2b÷ ( 1 + 10%)10= US$806m
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$1.6b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$11.5, the company appears about fair value at a 11% 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.
Important 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 MasterBrand 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 10%, which is based on a levered beta of 1.529. 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.
Check out our latest analysis for MasterBrand
SWOT Analysis for MasterBrand
- Debt is well covered by cash flow.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Current share price is below our estimate of fair value.
- No apparent threats visible for MBC.
Moving On:
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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For MasterBrand, we've compiled three pertinent items you should look at:
- Risks: Case in point, we've spotted 4 warning signs for MasterBrand you should be aware of, and 2 of them are a bit concerning.
- Future Earnings: How does MBC'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 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!
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.
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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.