How far off is B&G Foods (NYSE:BGS) to its intrinsic value? I am going to take a look now by taking the expected future cash flows and discounted them to the value today. A discounted cash flow (DCF) analysis represents the net present value (NPV) of projected cash flows to a stock. Don'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.

If you are reading this and its not September 2017 then I highly recommend you check out the latest calculation for B&G Foods by following the link below. View our latest analysis for B&G Foods

We are going to use a two stage model that takes into account two stages of growth. The first stage may have a high growth rate and the second stage is usually assumed to have a stable growth rate. To begin with we have to get estimates of the next 5 years of cash flows, where possible I use analysts estimates but when these aren't available I have extrapolated the previous Free Cash Flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past 5 years, but capped to a reasonable level. The sum of these cash flows is then discounted to today's value.

### The calculation

Please note that the numbers here are in millions apart from the per share values.

#### 5-year cash flow estimate

2017 | 2018 | 2019 | 2020 | 2021 | |

Levered FCF (USD, Millions) | $112.24 | $193.93 | $212.00 | $248.04 | $287.73 |

Source | Analyst x2 | Analyst x2 | Analyst x1 | Extrapolated @ (17%, capped from 23.46%) | Extrapolated @ (16%, capped from 23.46%) |

Present Value Discounted @ 8.68% | $103.28 | $164.19 | $165.15 | $177.80 | $189.77 |

Present value of next 5 years cash flows: $800

The 2nd stage is also known as Terminal Value, this is the cash flows to the business after the 1st stage. For a number of reasons a very conservative rate is used that cannot exceed that of the GDP. In this case I have used the 10 year government bond rate (2.3%). In the same way as with the 5 year 'growth' period we discount this to today's value.

#### Terminal Value

Terminal Value = FCF_{2021} Ã— (1 + g) Ã· (Discount Rate â€“ g)

Terminal Value = $288 Ã— (1 + 2.3%) Ã· (8.7% â€“ 2.3%)

Terminal value based on the Perpetuity Method where growth (g) = 2.3%: $4,637

**Present value of terminal value: $3,058**

The total value or equity value is then the sum of of the present value of the cash flows.

#### Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value = $800 + $3,058 = $3,858

In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number.

Value = Total value / Shares Outstanding ($3,858.23 / 66.50)

**Value per share: $58.02**

Now when we compare the intrinsic value of 58.02 to the current share price of $31.75 we see B&G Foods (NYSE:BGS) is quite undervalued at a **45% discount to what it is available for right now**.

### Important assumptions

I'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. You don't have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at B&G Foods as potential investors the Cost of Equity is used as the discount rate, not the Cost of Capital (or Weighed Average Cost of Capital/ WACC) which accounts for debt.

In this calculation I've used 8.7% and this is based on a Levered Beta of 0.828. I'm not going to go into how I calculate the Levered Beta in detail, I used the 'Bottom up Beta' method based on the comparable businesses, I also impose a limit between 0.8 and 2 which is a reasonable range for a stable business. Google this if you want to learn more.

### Final Words

Whilst important, DCF calculation shouldnâ€™t be the only metric you look at when researching a company. Is B&G Foods in a healthy financial condition? What is the reason for the share price to differ from the intrinsic value?** See our latest FREE analysis to find out!**

PS. Not interested in BGS anymore? Use our free platform to discover stocks undervalued by more than 20% based on their DCF valuation.

*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.*