Key Insights

Restaurant Brands International Limited Partnership's estimated fair value is CA$73.64 based on 2 Stage Free Cash Flow to Equity With CA$87.11 share price, Restaurant Brands International Limited Partnership appears to be trading close to its estimated fair value Industry average of 12% suggests Restaurant Brands International Limited Partnership's peers are currently trading at a lower premium to fair value

How far off is Restaurant Brands International Limited Partnership (TSE:QSP.UN) 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 forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Restaurant Brands International Limited Partnership

The Model

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. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions)  US$1.24b US$1.22b US$1.22b US$1.23b US$1.24b US$1.25b US$1.28b US$1.30b US$1.32b US$1.35b Growth Rate Estimate Source Est @ -3.09% Est @ -1.48% Est @ -0.36% Est @ 0.43% Est @ 0.98% Est @ 1.37% Est @ 1.64% Est @ 1.83% Est @ 1.96% Est @ 2.05% Present Value ($, Millions) Discounted @ 8.8%  US$1.1k US$1.0k US$947 US$874 US$811 US$755 US$705 US$660 US$618 US$580

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$8.1b

Story Continues

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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$1.4b× (1 + 2.3%) ÷ (8.8%– 2.3%) = US$21b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$21b÷ ( 1 + 8.8%)10= US$9.0b

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$17b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$87.1, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.TSX:QSP.UN Discounted Cash Flow January 17th 2025

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Restaurant Brands International Limited Partnership 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 8.8%, which is based on a levered beta of 1.592. 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 Limited Partnership

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings.

Dividends are covered by earnings and cash flows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Hospitality market.

Current share price is above our estimate of fair value.

Opportunity

QSP.UN's financial characteristics indicate limited near-term opportunities for shareholders.

Lack of analyst coverage makes it difficult to determine QSP.UN's earnings prospects.

Threat

Debt is not well covered by operating cash flow.

Moving On:

Although the valuation of a company is important, 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Restaurant Brands International Limited Partnership, there are three further factors you should explore:

Risks: Every company has them, and we've spotted  2 warning signs for Restaurant Brands International Limited Partnership  you should know about. 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! Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks 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.

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