XOMA Corporation (NASDAQ:XOMA) Shares Could Be 20% Below Their Intrinsic Value Estimate
Today we’ll walk through one way to estimate the intrinsic value of XOMA Corporation (NASDAQ:XOMA) by taking the company’s expected future cash flows and discounting them to the present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
See our latest analysis for XOMA
crush numbers
We will use a twostage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported 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 more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10Year Free Cash Flow (FCF) Forecast
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 

Leveraged FCF ($, millions) 
$3.85 million 
$5.83 million 
$7.96 million 
$10.1 million 
$12.0 million 
$13.6 million 
$15.0 million 
$16.2 million 
$17.1 million 
$17.9 million 
Growth rate estimate Source 
Is at 72.69% 
Is at 51.46% 
East @ 36.6% 
East @ 26.19% 
Is at 18.91% 
Is at 13.81% 
Is at 10.25% 
Is at 7.75% 
Is at 6% 
Is at 4.78% 
Present value (in millions of dollars) discounted at 5.6% 
$3.6 
$5.2 
$6.8 
$8.1 
$9.1 
$9.8 
$10.3 
$10.5 
$10.5 
$10.4 
(“East” = FCF growth rate estimated by Simply Wall St)
10year discounted cash flow (PVCF) = $84 million
We now need to calculate the terminal value, which represents all future cash flows after this tenyear period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5year average 10year government bond yield of 1.9%. We discount terminal cash flows to present value at a cost of equity of 5.6%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = $18 million × (1 + 1.9%) ÷ (5.6%–1.9%) = $501 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $501m ÷ (1 + 5.6%)^{ten}= $292 million
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $376 million. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US$26.5, the company looks slightly undervalued at a 20% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Important assumptions
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with 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 consider XOMA 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 debt into account. In this calculation, we used 5.6%, which is based on a leveraged beta of 0.860. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of 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 riskfree rate can have a significant impact on the valuation. Can we understand why the company is trading at a discount to its intrinsic value? For XOMA, we’ve rounded up three more things you should consider:

Risks: For example, we have identified 3 warning signs for XOMA (1 is potentially serious) of which you should be aware.

Future earnings: How does XOMA’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.

Other highquality alternatives: Do you like a good allrounder? Explore our interactive list of highquality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, do a search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted longterm analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from pricesensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.