How far off is Puma Biotechnology Inc (NASDAQ:PBYI) 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. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Puma Biotechnology here.
Is PBYI fairly valued?
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I use the analyst consensus forecast of PBYI’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.25%. This resulted in a present value of 5-year cash flow of $793.1M. Want to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how PBYI’s earnings are expected to move going forward, which should give you some color on PBYI’s outlook. Next, I determine 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 perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $6,392.4M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $7,185.5M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $191.46, which, compared to the current share price of $98.05, we see that Puma Biotechnology is quite undervalued at a 48.79% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it 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 PBYI, I’ve compiled three important aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.