In this article I am going to calculate the intrinsic value of Depomed Inc (NASDAQ:DEPO) 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 Depomed here.
Crunching the numbers
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. Firstly, I use the analyst consensus forecast of DEPO’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 12.21%. This resulted in a present value of 5-year cash flow of US$298.70M. Keen to know how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how DEPO’s top and bottom lines are expected to move in the future, which should give you an idea of DEPO’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable 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 US$327.10M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$625.80M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $9.84, which, compared to the current share price of $7.32, we find that Depomed is about right, perhaps slightly undervalued at a 25.62% 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 DEPO, I’ve put together three key aspects you should look at:
- Financial Health: Does DEPO 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 DEPO’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 DEPO? 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 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.