In this article I am going to calculate the intrinsic value of China Biologic Products Holdings Inc (NASDAQ:CBPO) 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. If you are reading this after November 2017 then I highly recommend you check out the latest calculation for China Biologic Products Holdings here.
Crunching the numbers
I use what is known as the 2-stage 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 perpetual stable growth rate. To begin, I took the analyst consensus estimates of CBPO’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 12.56%. 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 $612M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how CBPO’s earnings are expected to move in the future, which should give you some color on CBPO’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $1,454M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $2,066M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $74.83, which, compared to the current share price of $83.93, we find that China Biologic Products Holdings is fair value, maybe slightly overvalued and not available at a discount at this time.
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.
For CBPO, there are three key factors you should look at:
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.