Calculating The Fair Value Of Matson, Inc. (NYSE:MATX)

Matson, Inc. -0.37%
 Matson, Inc. MATX 129.19 -0.37%

### Key Insights

• Matson's estimated fair value is US\$129 based on 2 Stage Free Cash Flow to Equity
• Matson's US\$129 share price indicates it is trading at similar levels as its fair value estimate
• Peers of Matson are currently trading on average at a 16% discount

In this article we are going to estimate the intrinsic value of Matson, Inc. (NYSE:MATX) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

## What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, 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 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\$375.7m US\$392.2m US\$308.2m US\$262.8m US\$237.5m US\$223.2m US\$215.5m US\$211.7m US\$210.7m US\$211.4m Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Est @ -14.74% Est @ -9.61% Est @ -6.01% Est @ -3.49% Est @ -1.73% Est @ -0.50% Est @ 0.37% Present Value (\$, Millions) Discounted @ 6.9% US\$351 US\$343 US\$252 US\$201 US\$170 US\$150 US\$135 US\$124 US\$116 US\$108

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US\$2.0b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US\$211m× (1 + 2.4%) ÷ (6.9%– 2.4%) = US\$4.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US\$4.8b÷ ( 1 + 6.9%)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\$4.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US\$129, the company appears around fair value at the time of writing. 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.

## 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 Matson 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 6.9%, which is based on a levered beta of 0.984. 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.

## Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. For Matson, we've compiled three pertinent factors you should explore:

1. Future Earnings: How does MATX'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.
2. 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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.