Estimating The Intrinsic Value Of Cambrex Corporation (NYSE:CBM)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Cambrex Corporation (NYSE:CBM) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in February 2018 so be sure check the latest calculation for Cambrex here.
Crunching the numbers
We are going to use a two-stage DCF 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. To begin, I use the analyst consensus forecast of CBM’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.68%. This resulted in a present value of 5-year cash flow of $306.6M. Want to know how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how CBM’s earnings are expected to move going forward, which should give you some color on CBM’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. The present value of the terminal value after discounting it back five years is $1,244.3M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,550.9M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $47.32, which, compared to the current share price of $56.4, we see that Cambrex is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For CBM, I’ve put together three pertinent factors you should further examine:
1. Financial Health: Does CBM 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 CBM’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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CBM? 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.
