How far off is Portola Pharmaceuticals Inc (NASDAQ:PTLA) 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. Also note that this article was written in May 2018 so be sure check the latest calculation for Portola Pharmaceuticals here.
What’s the value?
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I pulled together the analyst consensus forecast of PTLA’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 10.79%. This resulted in a present value of 5-year cash flow of US$377.01M. Want to know how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how PTLA’s top and bottom lines are expected to move going forward, which should give you some color on PTLA’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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. Discounting the terminal value back five years gives us a present value of US$3.61B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$3.99B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $60.58, which, compared to the current share price of $40.76, we find that Portola Pharmaceuticals is quite undervalued at a 32.72% 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 PTLA, I’ve compiled three key aspects you should further research:
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Financial Health: Does PTLA 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 PTLA’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 PTLA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!