BellRing Brands, Inc.'s (NYSE:BRBR) Intrinsic Value Is Potentially 42% Above Its Share Price

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a day ago

Key Insights
The projected fair value for BellRing Brands is US$82.59 based on 2 Stage Free Cash Flow to Equity
BellRing Brands is estimated to be 30% undervalued based on current share price of US$58.20
The US$77.87 analyst price target for BRBR is 5.7% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of BellRing Brands, Inc. (NYSE:BRBR) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
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The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Levered FCF ($, Millions)
US$343.9m
US$390.5m
US$421.0m
US$456.0m
US$483.5m
US$508.1m
US$530.8m
US$552.0m
US$572.3m
US$592.1m
Growth Rate Estimate Source
Analyst x4
Analyst x3
Analyst x1
Analyst x1
Est @ 6.03%
Est @ 5.10%
Est @ 4.45%
Est @ 4.00%
Est @ 3.68%
Est @ 3.46%
Present Value ($, Millions) Discounted @ 7.2%
US$321
US$340
US$342
US$346
US$342
US$335
US$327
US$317
US$307
US$296
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$3.3b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.2%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$592m× (1 + 2.9%) ÷ (7.2%– 2.9%) = US$14b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 7.2%)10= US$7.2b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$10b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$58.2, the company appears a touch undervalued at a 30% 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. 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 BellRing Brands 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 7.2%, which is based on a levered beta of 0.976. 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.
View our latest analysis for BellRing Brands
SWOT Analysis for BellRing Brands
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings.
Weakness
Earnings growth over the past year is below its 5-year average.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Trading below our estimate of fair value by more than 20%.
Threat
Debt is not well covered by operating cash flow.
Total liabilities exceed total assets, which raises the risk of financial distress.
Annual earnings are forecast to grow slower than the American market.
Next Steps:
Whilst important, the DCF calculation is only one of many factors that you need to assess 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 BellRing Brands, there are three essential elements you should look at:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with BellRing Brands , and understanding these should be part of your investment process.
Future Earnings: How does BRBR'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 NYSE 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.
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