Mondelez International, Inc. (NASDAQ:MDLZ) Shares Could Be 43% Below Their Intrinsic Value Estimate

Key Insights

• Mondelez International's estimated fair value is US$118 based on 2 Stage Free Cash Flow to Equity
• Mondelez International's US$67.32 share price signals that it might be 43% undervalued
• The US$70.41 analyst price target for MDLZ is 41% less than our estimate of fair value

How far off is Mondelez International, Inc. (NASDAQ:MDLZ) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Our free stock report includes 1 warning sign investors should be aware of before investing in Mondelez International. Read for free now.

Is Mondelez International Fairly Valued?

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. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$3.48b	US$4.09b	US$4.88b	US$5.34b	US$5.70b	US$6.01b	US$6.29b	US$6.55b	US$6.79b	US$7.02b
Growth Rate Estimate Source	Analyst x6	Analyst x6	Analyst x3	Analyst x1	Est @ 6.64%	Est @ 5.48%	Est @ 4.66%	Est @ 4.09%	Est @ 3.68%	Est @ 3.40%
Present Value ($, Millions) Discounted @ 6.2%	US$3.3k	US$3.6k	US$4.1k	US$4.2k	US$4.2k	US$4.2k	US$4.1k	US$4.0k	US$3.9k	US$3.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$40b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.8%) 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 6.2%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$7.0b× (1 + 2.8%) ÷ (6.2%– 2.8%) = US$208b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$208b÷ ( 1 + 6.2%)¹⁰= US$114b

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$153b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$67.3, the company appears quite good value at a 43% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Mondelez 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 6.2%, which is based on a levered beta of 0.800. 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.

Check out our latest analysis for Mondelez International

SWOT Analysis for Mondelez International

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Mondelez International, there are three relevant items you should assess:

1. Risks: You should be aware of the 1 warning sign for Mondelez International we've uncovered before considering an investment in the company.
2. Future Earnings: How does MDLZ'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. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.