How we value Consumer stocks
Model: FCF-Based DCF
A classic Discounted Cash Flow model built on Free Cash Flow (FCF), the actual cash a business generates after all operating expenses and capital expenditures. Future FCF is projected for 10 years with gradually decaying growth, then discounted back to today's value using WACC. This is the gold standard of intrinsic valuation: it values the company based on what it can actually deliver to shareholders, independent of market sentiment.
Why this model
Consumer staples/retail generate steady, predictable free cash flows, making them ideal for DCF. The time value of money principle means a dollar today is worth more than a dollar tomorrow. DCF captures this by discounting future cash flows at a rate reflecting the investment's risk (WACC).
How it is calculated
Takes 3-year median FCF as the base. Estimates growth via ROIC x reinvestment rate (Damodaran framework), falling back to historical revenue growth. Projects 10 years with decay toward terminal growth (2.5%). Discounts at CAPM-derived WACC.
Best suited to
Stable consumer businesses (food, beverage, retail, healthcare) with predictable, positive free cash flows.