Fair value calculation for Murphy USA Inc. (NYSE:MUSA)

key insights

• Murphy USA’s estimated fair value is $416 based on two-stage free cash flows into the stock.
• At $412, Murphy USA stock appears to be trading close to its estimated fair value.
• Our fair value estimate is 1.8% lower than Murphy USA’s analyst price target of $424

How far is Murphy USA Inc. (NYSE:MUSA) from its intrinsic value? Using the latest financial data, we discount expected future cash flows to its current value to find out if the stock is priced at its fair value. Check if there is. One way to accomplish this is to employ a discounted cash flow (DCF) model. Please read it before you think you don’t understand it. It’s actually much less complicated than you might imagine.

We generally think of a company’s value as the present value of all the cash it will generate in the future. However, DCF is just one metric among many, and it is not without its flaws. If you still have doubts about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Murphy USA.

What is the estimated valuation?

We use a so-called two-stage model. This means that there are two different periods in the growth rate of the company’s cash flow. Generally, the first stage is a higher growth stage and the second stage is a lower growth stage. First, you need to estimate your cash flows for the next 10 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 that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and the sum of these future cash flows is discounted to today’s value.

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = USD 3.5 billion

Next, you need to calculate the terminal value, which takes into account all future cash flows over this 10-year period. For various reasons, a very conservative growth rate is used that cannot exceed the country’s GDP growth rate. In this case, we used the five-year average of the 10-year Treasury yield (2.3%) to estimate future growth. As with the 10-year “growth” period, we use a cost of capital of 7.6% to discount future cash flows to their present value.

Terminal value (TV)=FCF₂₀₃₃ × (1 + g) ÷ (r – g) = USD 563 million × (1 + 2.3%) ÷ (7.6% – 2.3%) = USD 11 billion

Present Value of Terminal Value (PVTV)= TV / (1 + r)^Ten= USD 11 billion ÷ ( 1 + 7.6%)^Ten= 5.2 billion USD

The total value, or capital value, is the sum of the present values ​​of future cash flows, which in this case is USD 8.7 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of $412, the company appears to be at about fair value, which is a 0.9% discount to the current share price. The assumptions in the calculations have a significant impact on the valuation, so it’s best to view this as a rough estimate rather than an exact estimate down to the last cent.

Important prerequisites

It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering Murphy USA as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity considering debt (or weighted average cost of capital, WACC). For this calculation, we used 7.6% based on a leverage beta of 1.159. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values ​​are derived from industry average beta values ​​for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.

SWOT analysis of Murphy USA

to the next:

While a company’s valuation is important, ideally it is not the only analysis that scrutinizes a company. The DCF model is not a perfect stock valuation tool. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” Outcomes can vary widely if companies grow at different rates or if their cost of equity or risk-free rate changes rapidly. For Murphy USA, he summarized three key factors that need further investigation.

1. risk: Please note. 2 warning signs for Murphy USA We discovered the following before considering investing in the company:
2. future earnings: How does MUSA’s growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.
3. Other strong businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven’t considered before?

PS. Simply Wall St updates DCF calculations for all US stocks daily, so if you want to know the intrinsic value of other stocks, 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.