Calculating The Intrinsic Value Of Monster Beverage Corporation (NASDAQ:MNST)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Monster Beverage fair value estimate is US$62.82

• Monster Beverage's US$52.70 share price indicates it is trading at similar levels as its fair value estimate

• Our fair value estimate is 1.1% higher than Monster Beverage's analyst price target of US$62.17

Today we will run through one way of estimating the intrinsic value of Monster Beverage Corporation (NASDAQ:MNST) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

See our latest analysis for Monster Beverage

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$1.66b	US$2.02b	US$2.12b	US$2.31b	US$2.50b	US$2.65b	US$2.77b	US$2.89b	US$2.99b	US$3.08b
Growth Rate Estimate Source	Analyst x6	Analyst x7	Analyst x2	Analyst x2	Analyst x2	Est @ 5.78%	Est @ 4.76%	Est @ 4.05%	Est @ 3.55%	Est @ 3.20%
Present Value ($, Millions) Discounted @ 6.1%	US$1.6k	US$1.8k	US$1.8k	US$1.8k	US$1.9k	US$1.9k	US$1.8k	US$1.8k	US$1.8k	US$1.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$18b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 6.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$3.1b× (1 + 2.4%) ÷ (6.1%– 2.4%) = US$86b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$86b÷ ( 1 + 6.1%)¹⁰= US$48b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$65b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$52.7, the company appears about fair value at a 16% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf

Important Assumptions

We would 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 don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Monster Beverage 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 6.1%, 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.

SWOT Analysis for Monster Beverage

Strength

• Earnings growth over the past year exceeded its 5-year average.

• Currently debt free.

Weakness

• Earnings growth over the past year underperformed the Beverage industry.

Opportunity

• Annual revenue is forecast to grow faster than the American market.

• Current share price is below our estimate of fair value.

Threat

• Annual earnings are forecast to grow slower than the American market.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Monster Beverage, there are three pertinent factors you should consider:

1. Risks: For instance, we've identified 1 warning sign for Monster Beverage that you should be aware of.

2. 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.

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 NASDAQGS every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.