Does Integra LifeSciences Holdings Corporation (NASDAQ: IART) trade at a 28% discount?
Today we are going to take a simple overview of a valuation method used to estimate the attractiveness of Integra LifeSciences Holdings Corporation (NASDAQ: IART) as an investment opportunity by taking forecast of future cash flows of the business and discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
We draw your attention to the fact that there are many ways to evaluate a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be of interest to you.
Check out our latest analysis for Integra LifeSciences Holdings
We’re going to use a two-stage DCF model, which, as the name suggests, takes into account two growth stages. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 190.8 million||US $ 246.2 million||US $ 293.6 million||US $ 336.7 million||US $ 384.9 million||US $ 420.3 million||US $ 449.9 million||US $ 474.8 million||US $ 496.0 million||514.4 million US dollars|
|Source of growth rate estimate||Analyst x3||Analyst x3||Analyst x3||Analyst x1||Analyst x1||East @ 9.21%||Est @ 7.04%||East @ 5.53%||East @ 4.46%||Est @ 3.72%|
|Present value (in millions of dollars) discounted at 6.7%||179 USD||$ 216||US $ 241||US $ 259||US $ 278||284 USD||US $ 285||US $ 282||276 USD||US $ 268|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 2.6 billion US dollars
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. 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 used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year âgrowthâ period, we discount future cash flows to their present value, using a cost of equity of 6.7%.
Terminal value (TV)= FCF2030 Ã (1 + g) Ã· (r – g) = US $ 514 million Ã (1 + 2.0%) Ã· (6.7% to 2.0%) = US $ 11 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 11b Ã· (1 + 6.7%)ten= US $ 5.7 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 8.3 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of US $ 70.4, the company appears to be slightly undervalued with a 28% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Integra LifeSciences Holdings 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 takes into account debt. . In this calculation, we used 6.7%, which is based on a leveraged beta of 1.008. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While important, calculating DCF is just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. What is the reason why the stock price is below intrinsic value? For Integra LifeSciences Holdings, you need to assess three other things:
- Risks: Take risks, for example – Integra LifeSciences Holdings has 2 warning signs (and 1 which is a bit rude) we think you should be aware of.
- Future benefits: How does IART’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what else you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions, do a search here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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