Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Phibro Animal Health Corporation (NASDAQ:PAHC) as an investment opportunity. 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 December 2017 so be sure check the latest calculation for Phibro Animal Health here.
Crunching the numbers
I use what is known as the 2-stage 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. Firstly, I took the analyst consensus forecast of PAHC’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.49%. 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 $386.4M. Want to understand how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how PAHC’s top and bottom lines are expected to move going forward, which should give you an idea of PAHC’s outlook. Now we need to calculate the terminal value, which accounts for all the future cash flows after the five years. 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 $1,231.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,617.5M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $40.25, which, compared to the current share price of $34.7, we find that Phibro Animal Health is about right, perhaps slightly undervalued at a 13.79% discount to what it is available for right now.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For PAHC, there are three relevant factors you should further examine:
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.