Investors In Constellation Brands Inc (STZ) Are Paying Above The Intrinsic Value
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Constellation Brands Inc (NYSE:STZ) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after November 2017 then I highly recommend you check out the latest calculation for Constellation Brands here.
What’s the value?
I will be 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 perpetual stable growth rate. Firstly, I use the analyst consensus forecast of STZ’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. This resulted in a present value of 5-year cash flow of $5,434M. Want to understand how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how STZ’s earnings are expected to move going forward, which should give you an idea of STZ’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. The present value of the terminal value after discounting it back five years is $24,272M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $29,706M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $151.87, which, compared to the current share price of $217.34, we see that Constellation Brands is rather overvalued and not available at a discount at this time.
Next Steps:
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. What is the reason for the share price to differ from the intrinsic value? For STZ, I’ve put together three key factors you should further research:
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.
