Advertisement
U.S. markets open in 8 hours 7 minutes
  • S&P Futures

    5,207.75
    -7.00 (-0.13%)
     
  • Dow Futures

    39,208.00
    -15.00 (-0.04%)
     
  • Nasdaq Futures

    18,179.50
    -52.00 (-0.29%)
     
  • Russell 2000 Futures

    2,047.10
    -2.70 (-0.13%)
     
  • Crude Oil

    82.58
    -0.14 (-0.17%)
     
  • Gold

    2,162.50
    -1.80 (-0.08%)
     
  • Silver

    25.30
    +0.03 (+0.12%)
     
  • EUR/USD

    1.0870
    -0.0007 (-0.07%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • Vix

    14.33
    -0.08 (-0.56%)
     
  • GBP/USD

    1.2716
    -0.0013 (-0.10%)
     
  • USD/JPY

    150.2190
    +1.1210 (+0.75%)
     
  • Bitcoin USD

    65,160.35
    -3,092.55 (-4.53%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,722.55
    -4.87 (-0.06%)
     
  • Nikkei 225

    39,889.44
    +149.04 (+0.38%)
     

Calculating The Fair Value Of Medpace Holdings, Inc. (NASDAQ:MEDP)

Today we will run through one way of estimating the intrinsic value of Medpace Holdings, Inc. (NASDAQ:MEDP) by taking the expected future cash flows and discounting them to their present value. I will be using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Medpace Holdings

The method

We're using the 2-stage growth 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 a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Levered FCF ($, Millions)

US$146.8m

US$162.2m

US$162.6m

US$164.3m

US$166.8m

US$169.9m

US$173.5m

US$177.6m

US$181.9m

US$186.5m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Est @ 0.27%

Est @ 1.01%

Est @ 1.53%

Est @ 1.89%

Est @ 2.14%

Est @ 2.32%

Est @ 2.44%

Est @ 2.53%

Present Value ($, Millions) Discounted @ 8.8%

US$135

US$137

US$126

US$117

US$109

US$102

US$95.9

US$90.1

US$84.8

US$79.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.1b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.

Terminal Value (TV)= FCF2019 × (1 + g) ÷ (r – g) = US$186m× (1 + 2.7%) ÷ 8.8%– 2.7%) = US$3.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.1b÷ ( 1 + 8.8%)10= US$1.3b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$70.9, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

NasdaqGS:MEDP Intrinsic value, November 13th 2019
NasdaqGS:MEDP Intrinsic value, November 13th 2019

Important assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Medpace Holdings 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 accounts for debt. In this calculation we've used 8.8%, which is based on a levered beta of 1.026. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Medpace Holdings, I've put together three relevant aspects you should look at:

  1. Financial Health: Does MEDP 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.

  2. Future Earnings: How does MEDP'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.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MEDP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

Advertisement