Is Monster Beverage Corporation (NASDAQ:MNST) Expensive For A Reason? A Look At The Intrinsic Value
How far off is Monster Beverage Corporation (NASDAQ:MNST) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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 April 2018 then I highly recommend you check out the latest calculation for Monster Beverage here.
Crunching the numbers
I will be using the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I took the analyst consensus forecast of MNST’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity 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$4.81B. Keen to understand how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how MNST’s earnings are expected to move going forward, which should give you some color on MNST’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of US$16.85B.
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$21.66B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $38.24, which, compared to the current share price of $55.73, we find that Monster Beverage is rather 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. What is the reason for the share price to differ from the intrinsic value? For MNST, I’ve compiled three pertinent aspects you should further research:
Financial Health: Does MNST 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 MNST’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 MNST? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
