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    Home » Is There An Opportunity With Hess Midstream LP’s (NYSE:HESM) 48% Undervaluation?
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    Is There An Opportunity With Hess Midstream LP’s (NYSE:HESM) 48% Undervaluation?

    userBy userJuly 6, 2025No Comments7 Mins Read
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    • Using the 2 Stage Free Cash Flow to Equity, Hess Midstream fair value estimate is US$73.37

    • Current share price of US$38.21 suggests Hess Midstream is potentially 48% undervalued

    • Analyst price target for HESM is US$44.00 which is 40% below our fair value estimate

    Today we will run through one way of estimating the intrinsic value of Hess Midstream LP (NYSE:HESM) by taking the forecast future cash flows of the company and discounting them back to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don’t get put off by the jargon, the math behind it is actually quite straightforward.

    We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

    We’ve found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

    We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

    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:

    2026

    2027

    2028

    2029

    2030

    2031

    2032

    2033

    2034

    2035

    Levered FCF ($, Millions)

    US$818.8m

    US$837.1m

    US$701.7m

    US$693.4m

    US$694.2m

    US$700.9m

    US$711.8m

    US$725.8m

    US$742.2m

    US$760.5m

    Growth Rate Estimate Source

    Analyst x2

    Analyst x2

    Analyst x1

    Analyst x1

    Est @ 0.12%

    Est @ 0.96%

    Est @ 1.56%

    Est @ 1.97%

    Est @ 2.26%

    Est @ 2.47%

    Present Value ($, Millions) Discounted @ 6.9%

    US$766

    US$733

    US$575

    US$531

    US$497

    US$470

    US$446

    US$426

    US$407

    US$391

    (“Est” = FCF growth rate estimated by Simply Wall St)
    Present Value of 10-year Cash Flow (PVCF) = US$5.2b

    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. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 6.9%.

    Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$761m× (1 + 2.9%) ÷ (6.9%– 2.9%) = US$20b

    Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$20b÷ ( 1 + 6.9%)10= US$10b

    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$15b. 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$38.2, the company appears quite undervalued at a 48% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

    NYSE:HESM Discounted Cash Flow July 6th 2025

    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. 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 Hess Midstream 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 6.9%, which is based on a levered beta of 0.913. 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.

    See our latest analysis for Hess Midstream

    Strength

    Weakness

    Opportunity

    Threat

    Whilst important, the DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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 Hess Midstream, there are three fundamental factors you should explore:

    1. Risks: As an example, we’ve found 2 warning signs for Hess Midstream (1 shouldn’t be ignored!) that you need to consider before investing here.

    2. Future Earnings: How does HESM’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.

    3. 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

    —

    Investing narratives with Fair Values

    View more featured narratives

    —

    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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