Sealed Air Corporation (NYSE:SEE)’s intrinsic value may be 79% above its share price

Key findings

• The projected fair value for Sealed Air is $64.40 based on 2-step Free Cash Flow to Equity

• Sealed Air’s share price of $35.98 suggests the company may be undervalued by 44%

• The analyst price target of $44.83 for SEE is 30% below our fair value estimate

In this article, we will estimate the intrinsic value of Sealed Air Corporation (NYSE:SEE) by taking the expected future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. There’s actually not too much involved in it, even though it may seem quite complex.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many and is not without its flaws. For those who enjoy stock analysis, the Simply Wall St analysis model presented here might be of interest.

Check out our latest analysis for Sealed Air

The model

We use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to obtain 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

The story goes on

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 3.4 billion US dollars

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value, which takes into account all future cash flows after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.4%) 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 7.3%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = 589 million US dollars × (1 + 2.4%) ÷ (7.3% – 2.4%) = 12 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 12 billion US dollars ÷ (1 + 7.3%)¹⁰= 6.0 billion US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $9.4 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of $36.00, the company appears quite undervalued at a 44% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

The key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. DCF also doesn’t take into account the potential cyclicality of an industry or a company’s future capital needs, and therefore doesn’t provide a complete picture of a company’s potential performance. Since we’re looking at Sealed Air 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 takes debt into account. In this calculation, we used 7.3%, which is based on a levered beta of 1.074. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Sealed Air

Strength

weakness

Opportunity

Danger

Looking ahead:

Although the DCF calculation is important, ideally it should not be the only analysis you review for a company. The DCF model is not a perfect tool for stock valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. Can we find out why the company is trading at a discount to intrinsic value? For Sealed Air, there are three relevant aspects you should evaluate:

1. Risks: Consider, for example, the ever-present specter of investment risk. We have identified 2 warning signs with Sealed Air (at least 1, potentially serious problem), and understanding them should be part of your investment process.

2. Future income: How is SEE’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.

3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app does a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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