How far off is Genomic Health Inc (NASDAQ:GHDX) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for Genomic Health here.
Crunching the numbers
We are going to use a two-stage DCF 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 perpetual stable growth rate. To start off, I pulled together the analyst consensus estimates of GHDX’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.18%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of US$206.47M. Keen to know how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how GHDX’s top and bottom lines are expected to move going forward, which should give you an idea of GHDX’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$602.37M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$808.84M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $22.90, which, compared to the current share price of $31.29, we see that Genomic Health is quite expensive and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For GHDX, there are three pertinent factors you should look at:
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Financial Health: Does GHDX have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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Future Earnings: How does GHDX’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of GHDX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!