Calculating The Fair Value Of Hill-Rom Holdings Inc (NYSE:HRC)
I am going to run you through how I calculated the intrinsic value of Hill-Rom Holdings Inc (NYSE:HRC) using the discounted cash flow (DCF) method. 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 March 2018 then I highly recommend you check out the latest calculation for Hill-Rom Holdings here.
Is HRC fairly valued?
I will be using 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 took the analyst consensus forecast of HRC’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.2%. 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$1.50B. Want to know how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how HRC’s earnings are expected to move in the future, which should give you some color on HRC’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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 US$4.15B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$5.65B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $85.39, which, compared to the current share price of $86.92, we find that Hill-Rom Holdings is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For HRC, there are three pertinent factors you should further research:
Financial Health: Does HRC 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.
Future Earnings: How does HRC’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of HRC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE 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.
