Estimating The Intrinsic Value Of McCormick & Company Incorporated (NYSE:MKC)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of McCormick & Company Incorporated (NYSE:MKC) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in March 2018 so be sure check the latest calculation for McCormick here.
Is MKC fairly valued?
I use what is known as the 2-stage 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 start off, I took the analyst consensus estimates of MKC’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.49%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of US$2.92B. Want to understand how I calculated this value? Read our detailed analysis here.
The graph above shows how MKC’s top and bottom lines are expected to move in the future, which should give you an idea of MKC’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes US$9.57B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$12.49B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $95.27, which, compared to the current share price of $107.81, we find that McCormick is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For MKC, I’ve put together three pertinent aspects you should further examine:
Financial Health: Does MKC have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does MKC’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: Are there other high quality stocks you could be holding instead of MKC? 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 for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
