Estimating The Fair Value Of Marriott International, Inc. (NASDAQ:MAR)
Key Insights
- Marriott International's estimated fair value is US$262 based on 2 Stage Free Cash Flow to Equity
- Marriott International's US$273 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for MAR is US$281, which is 7.3% above our fair value estimate
Does the July share price for Marriott International, Inc. (NASDAQ:MAR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF ($, Millions) | US$3.11b | US$3.26b | US$3.75b | US$4.07b | US$4.32b | US$4.54b | US$4.75b | US$4.94b | US$5.12b | US$5.30b |
| Growth Rate Estimate Source | Analyst x5 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 6.14% | Est @ 5.18% | Est @ 4.51% | Est @ 4.04% | Est @ 3.71% | Est @ 3.48% |
| Present Value ($, Millions) Discounted @ 8.4% | US$2.9k | US$2.8k | US$2.9k | US$2.9k | US$2.9k | US$2.8k | US$2.7k | US$2.6k | US$2.5k | US$2.4k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$27b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$5.3b× (1 + 2.9%) ÷ (8.4%– 2.9%) = US$99b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$99b÷ ( 1 + 8.4%)10= US$44b
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$72b. 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$273, 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.
The Assumptions
Now 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 Marriott 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 8.4%, which is based on a levered beta of 1.267. 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.
View our latest analysis for Marriott International
SWOT Analysis for Marriott International
- Debt is well covered by earnings.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the American market.
- Debt is not well covered by operating cash flow.
- Total liabilities exceed total assets, which raises the risk of financial distress.
- Annual earnings are forecast to grow slower than the American market.
Moving On:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Marriott International, there are three additional items you should assess:
- Risks: You should be aware of the 2 warning signs for Marriott International (1 is potentially serious!) we've uncovered before considering an investment in the company.
- Future Earnings: How does MAR'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 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks 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.