U.S. Markets open in 27 mins

# A Look At The Intrinsic Value Of Tempur Sealy International Inc (NYSE:TPX)

I am going to run you through how I calculated the intrinsic value of Tempur Sealy International Inc (NYSE:TPX) by taking the expected future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. Donâ€™t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.

### Whatâ€™s the value?

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the companyâ€™s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to todayâ€™s value.

#### 5-year cash flow estimate

 2019 2020 2021 2022 2023 Levered FCF (\$, Millions) \$174.33 \$166.80 \$217.55 \$280.50 \$283.94 Source Analyst x3 Analyst x2 Analyst x2 Analyst x2 Est @ 1.23% Present Value Discounted @ 11.51% \$156.34 \$134.15 \$156.90 \$181.42 \$164.70

Present Value of 5-year Cash Flow (PVCF)= US\$794m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year â€˜growthâ€™ period, we discount this to todayâ€™s value at a cost of equity of 11.5%.

Terminal Value (TV) = FCF2022 Ã— (1 + g) Ã· (r â€“ g) = US\$284m Ã— (1 + 2.9%) Ã· (11.5% â€“ 2.9%) = US\$3.4b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US\$3.4b Ã· ( 1 + 11.5%)5 = US\$2.0b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US\$2.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of \$50.96. Relative to the current share price of \$50.45, the stock is about right, perhaps slightly undervalued at a 1.0% discount to what it is available for right now.

### The assumptions

Iâ€™d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you donâ€™t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Tempur Sealy International as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation Iâ€™ve used 11.5%, which is based on a levered beta of 1.214. This is derived from the Bottom-Up Beta method based on 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 shouldnâ€™t be the only metric you look at when researching a company. For TPX, there are three key aspects you should further examine:

1. Financial Health: Does TPX 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.
2. Future Earnings: How does TPXâ€™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: Are there other high quality stocks you could be holding instead of TPX? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.