Is It Time To Reconsider Luckin Coffee (OTCPK:LKNC.Y) After Its DCF And P/E Signals?

• If you are wondering whether Luckin Coffee's share price still offers value after everything the company has been through, it becomes especially important to look closely at what you are paying for each unit of business performance.
• The stock most recently closed at US$33.65, with returns of 0.7% over 7 days, a 6.3% decline over 30 days, a 5.0% decline year to date, and a 29.5% return over 1 year, alongside a very large 5 year return of 277.2% that can influence expectations and risk views.
• Recent news around Luckin Coffee has focused on its recovery as a China based coffee chain listed in the US over the counter. There has been ongoing discussion about how its store network and brand position fit into China's growing coffee culture. Coverage has also highlighted how investors continue to weigh that operating backdrop against the company's past challenges and current market listing status, which helps frame the recent share price moves.
• On our checks, Luckin Coffee has a valuation score of 4 out of 6. This means it screens as undervalued on four of six metrics. We will break down what that score really means using several common valuation methods before finishing with a more complete way to think about the stock's value.

Luckin Coffee delivered 29.5% returns over the last year. See how this stacks up to the rest of the Hospitality industry.

Approach 1: Luckin Coffee Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a company might be worth by projecting its future cash flows and discounting them back to today, so you can compare that value with the current share price.

For Luckin Coffee, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections in CN¥. The latest twelve month free cash flow is about CN¥4.39b. Simply Wall St uses analyst estimates where available, then extends the series. For example, the 2035 projection in this model is CN¥5.39b, with each year between now and then stepped out using small incremental changes rather than new analyst forecasts.

Bringing all those projected cash flows back to today gives an estimated intrinsic value of about US$29.71 per share. Compared with the recent share price of US$33.65, the model implies the stock is around 13.3% overvalued on this basis.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Luckin Coffee may be overvalued by 13.3%. Discover 877 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Luckin Coffee.

Approach 2: Luckin Coffee Price vs Earnings

For a profitable business, the P/E ratio is a useful way to think about what you are paying for each unit of earnings. It ties the share price directly to current earnings, which many investors focus on when comparing companies in the same industry.

What counts as a “normal” P/E will depend a lot on how investors see growth potential and risk. Higher expected growth or lower perceived risk can support a higher multiple, while slower growth or higher risk usually line up with a lower one.

Luckin Coffee currently trades on a P/E of 19.27x. That sits below the Hospitality industry average of 22.02x and well below the peer group average of 63.97x. Simply Wall St also calculates a proprietary Fair Ratio of 27.22x for Luckin Coffee. This Fair Ratio reflects factors such as the company’s earnings growth profile, profit margins, industry, market cap and specific risks.

Because it is tailored to the company, the Fair Ratio can be more useful than a simple comparison with peers or the broad industry. Comparing Luckin Coffee’s current 19.27x P/E with the 27.22x Fair Ratio indicates that the shares are trading below that modelled level.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1449 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Luckin Coffee Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. Narratives let you set out your own story for Luckin Coffee by linking your view of its future revenue, earnings and margins to a financial forecast, a fair value estimate and a clear comparison with today’s price. All of this sits inside an easy tool on Simply Wall St’s Community page that updates automatically when new news or earnings land. One investor might build a Narrative that leans on store expansion, digital engagement and supply chain investment to support a fair value around US$49.63. Another might focus more on risks around rapid rollout, delivery costs and competition to justify a much lower fair value. This helps each of them decide whether the current price looks attractive or stretched.

Do you think there's more to the story for Luckin Coffee? Head over to our Community to see what others are saying!

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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