The intrinsic value of Sysco Corporation (NYSE:SYY) may be 99% higher than its share price

Key findings

• The estimated fair value of Sysco is $148 based on 2-step free cash flow to equity
• Sysco is estimated to be undervalued by 50% based on the current share price of $74.36.
• The analyst price target for SYY is $84.28, 43% below our fair value estimate.

Does Sysco Corporation (NYSE:SYY)’s July stock price reflect its true value? Today we’ll estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value using the discounted cash flow (DCF) model. This may sound complicated, but it’s actually quite simple!

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Sysco

The calculation

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 estimate the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate 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.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

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) = 22 billion US dollars

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that 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 6.3%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 3.6 billion US dollars × (1 + 2.4%) ÷ (6.3% – 2.4%) = 94 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= $94 billion ÷ (1 + 6.3%)¹⁰= 51 billion US dollars

The total value is calculated by adding the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $74 billion. The final step is to divide the equity value by the number of shares outstanding. Relative to the current share price of $74.4, the company appears significantly undervalued at a 50% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

Important 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 Sysco 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 6.3%, which is based on a leveraged beta of 0.852. 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 Sysco

Go on:

While a company’s valuation is important, it is only one of many factors you need to evaluate a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company is growing at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome may look very different. Why is the intrinsic value higher than the current share price? For Sysco, we have compiled three relevant elements for you to consider:

1. Risks: Take risks, for example – Sysco has 1 warning sign In our opinion, you should be aware of this.
2. Future income: How is SYY’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 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 out on!

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

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This Simply Wall St article is of a general nature. We comment solely on the basis of 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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