Is McCormick & Company, Incorporated (NYSE:MKC) Trading At A 30% Discount?

In This Article:

Key Insights

  • McCormick's estimated fair value is US$115 based on 2 Stage Free Cash Flow to Equity

  • McCormick is estimated to be 30% undervalued based on current share price of US$80.18

  • Our fair value estimate is 36% higher than McCormick's analyst price target of US$84.22

Today we will run through one way of estimating the intrinsic value of McCormick & Company, Incorporated (NYSE:MKC) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for McCormick

Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$916.2m

US$982.5m

US$1.08b

US$1.10b

US$1.13b

US$1.16b

US$1.18b

US$1.21b

US$1.24b

US$1.27b

Growth Rate Estimate Source

Analyst x4

Analyst x4

Analyst x2

Analyst x1

Est @ 2.28%

Est @ 2.35%

Est @ 2.39%

Est @ 2.42%

Est @ 2.45%

Est @ 2.46%

Present Value ($, Millions) Discounted @ 5.8%

US$866

US$878

US$910

US$881

US$852

US$824

US$797

US$772

US$748

US$724

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$8.3b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 5.8%.