Does Pilgrim’s Pleasure Company (NASDAQ: PPC) commerce at 22% off?

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Does Pilgrim’s Pride Corporation (NASDAQ: PPC) March share price reflect what it’s really worth? Today we’re going to estimate the intrinsic value of the stock by discounting expected future cash flows to today’s value. One way to achieve this is to use the DCF (Discounted Cash Flow) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you can imagine.

We point out that there are many ways to rate a company and, like with DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, you can read in detail the reasons behind this calculation in the Simply Wall St analytical model.

Check out our latest analysis for Pilgrim’s Pride

The calculation

We use the two-tier growth model, which simply means that we consider two phases of business growth. In the initial phase, the company can have a higher growth rate, and for the second phase, a stable growth rate is usually assumed. First, we need to estimate the cash flows for the next ten years. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the first few years than in later years.

In general, we assume that a dollar today is more valuable than a dollar in the future. Hence, we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow forecast (FCF)

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Leverage FCF ($, million)

$ 497.0 million

$ 440.0 million

$ 408.2 million

$ 390.0 million

$ 380.3 million

$ 376.0 million

$ 375.3 million

$ 377.1 million

$ 380.7 million

$ 385.5 million

Source for growth rate estimation

Analyst x1

Analyst x1

Actual @ -7.23%

Actual @ -4.45%

East @ -2.5%

Est @ -1.14%

East @ -0.19%

Est @ 0.48%

Actual @ 0.95%

Est @ 1.28%

Present Value ($, Million) Discounted 6.3%

US $ 467

US $ 389

US $ 340

$ 305

US $ 280

US $ 260

US $ 244

US $ 231

$ 219

$ 209

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = US $ 2.9b

The story goes on

The second level is also known as Terminal Value. This is the company’s cash flow after the first stage. The Gordon growth formula is used to calculate the terminal value using a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today’s value at a cost of equity of 6.3%.

Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US $ 386 million × (1 + 2.0%) ÷ (6.3% – 2.0%) = US $ 9.2b

Present value of the terminal value (PVTV)= TV / (1 + r) 10 = $ 9.2 billion ÷ (1 + 6.3%) 10 = $ 5.0 billion

The total or equity value is then the sum of the present value of the future cash flows, which in this case is $ 7.9 billion. In the last step, we divide the equity value by the number of shares issued. Compared to its current share price of $ 25.2, the company appears undervalued at a 22% discount to the current share price. The assumptions in any calculation have a huge impact on the valuation, so it is better to think of this as a rough estimate that is not accurate to the last cent.

dcf

The assumptions

The most important inputs for a discounted cash flow are now the discount rate and of course the actual cash flows. You do not have to agree to these entries. I recommend repeating the calculations yourself and playing with them. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so it does not give a complete picture of a company’s potential performance. Given that we view Pilgrim’s Pride 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) responsible for debt. In this calculation we used 6.3% based on a leverage beta of 0.820. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry-standard average beta of globally comparable companies with a set limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Go on:

Assessment is only one side of the coin in building your investment thesis and, ideally, not the only analysis you consider for a company. With a DCF model, it is not possible to get a foolproof rating. Rather, it should be seen as a guide to “what assumptions must be made for this stock to be undervalued or overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is the intrinsic value higher than the current share price? For Pilgrim’s Pride, we’ve put together three more elements that you should evaluate:

  1. Risks: For example, we identified 4 warning signs for pilgrim pride you should be aware of that.

  2. Future earnings: What is PPC’s growth rate compared to its competitors and the broader market? Learn more about analyst consensus number for the years to come 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 you might be missing!

PS. Simply Wall St updates its DCF calculation for every American share daily. So if you want to find out the intrinsic value of any other stock, just search here.

This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.

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