U.S. markets open in 6 hours 13 minutes
  • S&P Futures

    3,876.50
    -22.25 (-0.57%)
     
  • Dow Futures

    31,363.00
    -146.00 (-0.46%)
     
  • Nasdaq Futures

    13,192.75
    -87.00 (-0.66%)
     
  • Russell 2000 Futures

    2,256.80
    -18.00 (-0.79%)
     
  • Crude Oil

    59.89
    -0.75 (-1.24%)
     
  • Gold

    1,716.80
    -6.20 (-0.36%)
     
  • Silver

    26.14
    -0.54 (-2.04%)
     
  • EUR/USD

    1.2013
    -0.0046 (-0.38%)
     
  • 10-Yr Bond

    1.4460
    0.0000 (0.00%)
     
  • Vix

    23.35
    -4.60 (-16.46%)
     
  • GBP/USD

    1.3884
    -0.0036 (-0.26%)
     
  • USD/JPY

    106.8600
    +0.1300 (+0.12%)
     
  • BTC-USD

    48,515.45
    +2,327.45 (+5.04%)
     
  • CMC Crypto 200

    976.56
    -10.09 (-1.02%)
     
  • FTSE 100

    6,564.41
    -24.12 (-0.37%)
     
  • Nikkei 225

    29,408.17
    -255.33 (-0.86%)
     

A Look At The Intrinsic Value Of Sysco Corporation (NYSE:SYY)

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·6 min read
  • Oops!
    Something went wrong.
    Please try again later.

In this article we are going to estimate the intrinsic value of Sysco Corporation (NYSE:SYY) 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 generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.

Check out our latest analysis for Sysco

Step by step through the calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$915.3m

US$1.73b

US$2.10b

US$2.01b

US$2.04b

US$2.07b

US$2.11b

US$2.14b

US$2.18b

US$2.23b

Growth Rate Estimate Source

Analyst x6

Analyst x6

Analyst x3

Analyst x2

Analyst x1

Est @ 1.49%

Est @ 1.66%

Est @ 1.77%

Est @ 1.85%

Est @ 1.91%

Present Value ($, Millions) Discounted @ 6.2%

US$862

US$1.5k

US$1.7k

US$1.6k

US$1.5k

US$1.4k

US$1.4k

US$1.3k

US$1.3k

US$1.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$14b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.0%) 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 6.2%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$2.2b× (1 + 2.0%) ÷ (6.2%– 2.0%) = US$54b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$54b÷ ( 1 + 6.2%)10= US$30b

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$44b. 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$75.6, the company appears about fair value at a 12% 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.

dcf
dcf

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Sysco 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 0.800. 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.

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Sysco, we've compiled three pertinent factors you should explore:

  1. Risks: Take risks, for example - Sysco has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

  2. Future Earnings: How does SYY'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.

  3. 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.

This article by Simply Wall St is general in nature. 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 (at) simplywallst.com.