An Intrinsic Calculation For Pactiv Evergreen Inc. (NASDAQ:PTVE) Suggests It's 38% Undervalued

Pactiv Evergreen +2.69%

Pactiv Evergreen

PTVE

14.52

+2.69%

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Pactiv Evergreen fair value estimate is US$23.13
  • Pactiv Evergreen's US$14.32 share price signals that it might be 38% undervalued
  • Analyst price target for PTVE is US$16.43 which is 29% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Pactiv Evergreen Inc. (NASDAQ:PTVE) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. 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.

See our latest analysis for Pactiv Evergreen

What's The Estimated Valuation?

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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$171.7m US$215.8m US$233.3m US$248.1m US$260.8m US$272.0m US$282.0m US$291.3m US$299.9m US$308.2m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 8.10% Est @ 6.36% Est @ 5.14% Est @ 4.28% Est @ 3.68% Est @ 3.27% Est @ 2.97% Est @ 2.77%
Present Value ($, Millions) Discounted @ 8.1% US$159 US$185 US$184 US$181 US$176 US$170 US$163 US$156 US$148 US$141

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.7b

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. 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 8.1%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$308m× (1 + 2.3%) ÷ (8.1%– 2.3%) = US$5.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.4b÷ ( 1 + 8.1%)10= US$2.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$4.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$14.3, the company appears quite good value at a 38% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
NasdaqGS:PTVE Discounted Cash Flow March 29th 2024

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Pactiv Evergreen 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 8.1%, which is based on a levered beta of 1.271. 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 Pactiv Evergreen

Strength
  • No major strengths identified for PTVE.
Weakness
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Packaging 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Pactiv Evergreen, there are three fundamental items you should explore:

  1. Risks: Be aware that Pactiv Evergreen is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does PTVE's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years 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 is out there you may be missing!

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

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