Intrinsic math for Ocugen, Inc. (NASDAQ: OCGN) suggests it’s 46% undervalued
Today we are going to take a simple overview of a valuation method used to estimate the attractiveness of Ocugen, Inc. (NASDAQ: OCGN) as an investment opportunity by taking the flows of forecast future cash flow of the company and discounting them to their current value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
There are many ways that businesses can be valued, so we would like to stress that a DCF is not perfect for all situations. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
What is the estimated valuation?
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. First, we need to estimate the cash flow of the business over 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 the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
Typically, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) forecast
|Levered FCF ($, million)||– US $ 32.0 million||$ 230.0 million||205.5 million USD||$ 171.5 million||248.5 million USD||$ 251.8 million||255.6 million USD||$ 259.9 million||$ 264.6 million||$ 269.5 million|
|Source of estimated growth rate||Analyst x1||Analyst x2||Analyst x2||Analyst x2||Analyst x2||Is 1.31%||Is 1.53%||Is 1.68%||Is 1.79%||Is 1.87%|
|Present value (in millions of dollars) discounted at 7.1%||– $ 29.9||$ 201||US $ 167||US $ 130||US $ 176||US $ 167||US $ 158||US $ 150||$ 143||US $ 136|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 1.4 billion USD
The second stage is also known as terminal value, it is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.1%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = $ 270 million × (1 + 2.0%) ÷ (7.1% – 2.0%) = $ 5.5 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= 5.5 billion USD ÷ (1 + 7.1%)ten= 2.8 billion USD
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is US $ 4.1 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of US $ 11.2, the company appears to be quite undervalued with a 46% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
NasdaqCM: OCGN Discounted Cash Flow April 29, 2021
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and of course the actual cash flow. Part of investing is making your own assessment of a company’s future performance, so try the math yourself and check your own 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 Ocugen 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 represents debt. In this calculation, we used 7.1%, which is based on a leveraged beta of 0.964. 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 of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While a business valuation is important, ideally it won’t be the only analysis you review for a business. The DCF model is not a perfect inventory valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is lower than intrinsic value? For Ocugen, we have compiled three important aspects to consider:
- Risks: Take risks, for example – Ocugen has 4 warning signs (and 3 that are of concern) we think you should know.
- Future income: How does OCGN’s growth rate compare to its peers and to the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other strong companies: Low debt, high returns on equity, and good past performance are essential to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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