Advertisement
Singapore markets closed
  • Straits Times Index

    3,323.20
    -6.89 (-0.21%)
     
  • S&P 500

    5,306.04
    +1.32 (+0.02%)
     
  • Dow

    38,852.86
    -216.74 (-0.55%)
     
  • Nasdaq

    17,019.88
    +99.08 (+0.59%)
     
  • Bitcoin USD

    67,899.23
    -165.64 (-0.24%)
     
  • CMC Crypto 200

    1,464.26
    -20.44 (-1.38%)
     
  • FTSE 100

    8,206.42
    -47.76 (-0.58%)
     
  • Gold

    2,339.80
    -16.70 (-0.71%)
     
  • Crude Oil

    80.04
    +0.21 (+0.26%)
     
  • 10-Yr Bond

    4.5660
    +0.0240 (+0.53%)
     
  • Nikkei

    38,556.87
    -298.50 (-0.77%)
     
  • Hang Seng

    18,477.01
    -344.15 (-1.83%)
     
  • FTSE Bursa Malaysia

    1,605.35
    -10.47 (-0.65%)
     
  • Jakarta Composite Index

    7,140.23
    -113.40 (-1.56%)
     
  • PSE Index

    6,411.41
    -89.93 (-1.38%)
     

A Look At The Intrinsic Value Of Newell Brands Inc. (NASDAQ:NWL)

Key Insights

  • Newell Brands' estimated fair value is US$8.06 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$7.45 suggests Newell Brands is potentially trading close to its fair value

  • Analyst price target for NWL is US$7.75 which is 3.8% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Newell Brands Inc. (NASDAQ:NWL) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

ADVERTISEMENT

Check out our latest analysis for Newell Brands

The Method

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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$184.1m

US$302.2m

US$445.0m

US$403.7m

US$380.3m

US$367.4m

US$361.3m

US$359.5m

US$360.7m

US$364.1m

Growth Rate Estimate Source

Analyst x2

Analyst x3

Analyst x1

Est @ -9.28%

Est @ -5.81%

Est @ -3.38%

Est @ -1.68%

Est @ -0.49%

Est @ 0.35%

Est @ 0.93%

Present Value ($, Millions) Discounted @ 11%

US$165

US$243

US$321

US$261

US$221

US$191

US$169

US$151

US$136

US$123

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.0b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$364m× (1 + 2.3%) ÷ (11%– 2.3%) = US$4.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.0b÷ ( 1 + 11%)10= US$1.4b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.3b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$7.5, the company appears about fair value at a 7.5% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Newell Brands 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 11%, which is based on a levered beta of 2.000. 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 Newell Brands

Strength

  • No major strengths identified for NWL.

Weakness

  • Interest payments on debt are not well covered.

  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.

Opportunity

  • Expected to breakeven next year.

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Good value based on P/S ratio and estimated fair value.

Threat

  • Debt is not well covered by operating cash flow.

  • Paying a dividend but company is unprofitable.

  • Revenue is forecast to decrease over the next 2 years.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Newell Brands, we've put together three additional factors you should look at:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Newell Brands , and understanding it should be part of your investment process.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for NWL's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.