Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Matthews International Corporation (NASDAQ:MATW) 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 January 2018 then I highly recommend you check out the latest calculation for Matthews International here.
Is MATW fairly valued?
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Generally I like to use analyst consensus estimates for free cash flow, but given that MATW has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these figures at the rate of 8.86%. This resulted in a present value of 5-year cash flow of $548.3M. Want to know how I arrived at this number? Read our detailed analysis here.
The graph above shows how MATW’s top and bottom lines are expected to move going forward, which should give you an idea of MATW’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 $1,864.4M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $2,412.7M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $74.72, which, compared to the current share price of $53.9, we see that Matthews International is about right, perhaps slightly undervalued at a 27.86% discount to what it is available for right now.
Whilst important, DCF calculation 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 MATW, I’ve compiled three important aspects you should look at:
- 1. Financial Health: Does MATW 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 MATW’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MATW? 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 NASDAQ 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.