Calculating The Intrinsic Value Of Restaurant Brands International Inc. (NYSE:QSR)

Restaurant Brands International Inc -1.30%

Restaurant Brands International Inc

QSR

71.27

-1.30%

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Restaurant Brands International fair value estimate is US$66.65
  • With US$78.09 share price, Restaurant Brands International appears to be trading close to its estimated fair value
  • The US$78.75 analyst price target for QSR is 18% more than our estimate of fair value

How far off is Restaurant Brands International Inc. (NYSE:QSR) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

Check out our latest analysis for Restaurant Brands International

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$1.57b US$1.75b US$1.88b US$1.99b US$2.09b US$2.17b US$2.25b US$2.32b US$2.38b US$2.45b
Growth Rate Estimate Source Analyst x8 Analyst x4 Est @ 7.60% Est @ 5.98% Est @ 4.85% Est @ 4.06% Est @ 3.51% Est @ 3.12% Est @ 2.85% Est @ 2.66%
Present Value ($, Millions) Discounted @ 8.7% US$1.4k US$1.5k US$1.5k US$1.4k US$1.4k US$1.3k US$1.3k US$1.2k US$1.1k US$1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$13b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$2.4b× (1 + 2.2%) ÷ (8.7%– 2.2%) = US$38b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$38b÷ ( 1 + 8.7%)10= US$17b

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$30b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$78.1, 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.

dcf
NYSE:QSR Discounted Cash Flow December 29th 2023

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 Restaurant Brands International 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 8.7%, which is based on a levered beta of 1.304. 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 Restaurant Brands International

Strength
  • Debt is well covered by earnings.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Debt is not well covered by operating cash flow.
  • Annual earnings are forecast to grow slower than the American market.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Restaurant Brands International, we've put together three fundamental aspects you should explore:

  1. Risks: Every company has them, and we've spotted 2 warning signs for Restaurant Brands International (of which 1 is potentially serious!) you should know about.
  2. Future Earnings: How does QSR'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

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