In this article I am going to calculate the intrinsic value of CTI BioPharma Corp (NASDAQ:CTIC) 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 May 2018 then I highly recommend you check out the latest calculation for CTI BioPharma here.
What’s the value?
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I pulled together the analyst consensus estimates of CTIC’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.2%. This resulted in a present value of 5-year cash flow of -US$59.89M. Want to know how I arrived at this number? Check out our detailed analysis here.
The graph above shows how CTIC’s earnings are expected to move going forward, which should give you an idea of CTIC’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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$351.34M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$291.45M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $5.03, which, compared to the current share price of $3.93, we find that CTI BioPharma is about right, perhaps slightly undervalued at a 21.82% discount to what it is available for right now.
Whilst important, DCF calculation 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 CTIC, I’ve put together three important factors you should further research:
- Financial Health: Does CTIC 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 CTIC’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 CTIC? 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 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.