The projected fair value for Magnolia Oil & Gas is US$42.28 based on 2 Stage Free Cash Flow to Equity
Magnolia Oil & Gas' US$25.99 share price signals that it might be 39% undervalued
The US$28.26 analyst price target for MGY is 33% less than our estimate of fair value
Does the July share price for Magnolia Oil & Gas Corporation (NYSE:MGY) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Model
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$506.0m
US$559.0m
US$498.5m
US$501.0m
US$499.5m
US$501.9m
US$507.3m
US$514.7m
US$523.6m
US$533.7m
Growth Rate Estimate Source
Analyst x9
Analyst x4
Analyst x2
Analyst x1
Est @ -0.31%
Est @ 0.50%
Est @ 1.06%
Est @ 1.46%
Est @ 1.73%
Est @ 1.93%
Present Value ($, Millions) Discounted @ 7.6%
US$470
US$483
US$400
US$374
US$347
US$324
US$304
US$287
US$271
US$257
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$3.5b
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. 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 7.6%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$10b÷ ( 1 + 7.6%)10= US$5.1b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$8.6b. 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$26.0, the company appears quite undervalued at a 39% 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.
Important 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Magnolia Oil & Gas 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 7.6%, which is based on a levered beta of 1.131. 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 Magnolia Oil & Gas
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for MGY.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Oil and Gas market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for MGY?
Next Steps:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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. Why is the intrinsic value higher than the current share price? For Magnolia Oil & Gas, there are three fundamental aspects you should further research:
Risks: Take risks, for example - Magnolia Oil & Gas has 2 warning signs we think you should be aware of.
Future Earnings: How does MGY'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.
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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要見解
基於2階段自由現金流到股權的計算,Magnolia Oil & Gas 的預計公允價值爲42.28美元。
Magnolia Oil & Gas每股25.99美元的股票價格表明它可能被低估了39%。
MGY的28.26美元的分析師目標價比我們的公允價值估計低了33%。
七月份的Magnolia Oil & Gas Corporation (NYSE:MGY)股票價格是否反映了它真正的價值?我們將通過預測其未來現金流並將其貼現到今天的價值來估算這隻股票的內在價值。我們的分析將採用折現現金流模型(DCF)。聽起來可能很複雜,但實際上它非常簡單!