Estimating The Intrinsic Value Of Gilead Sciences Inc (NASDAQ:GILD)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Gilead Sciences Inc (NASDAQ:GILD) 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. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Gilead Sciences here.
What’s the value?
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 use the analyst consensus forecast of GILD’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 12.31%. This resulted in a present value of 5-year cash flow of $36,704.8M. Want to understand how I arrived at this number? Read our detailed analysis here.
In the visual above, we see how how GILD’s top and bottom lines are expected to move in the future, which should give you some color on GILD’s outlook. Now we need to calculate 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 steady 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 $59,098.3M.
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 $95,803.1M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $73.34, which, compared to the current share price of $72.7, we see that Gilead Sciences is about right, perhaps slightly undervalued at a 0.87% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For GILD, there are three relevant factors you should further examine:
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.
