An Intrinsic Calculation For Fulgent Genetics, Inc. (NASDAQ:FLGT) Suggests It's 32% Undervalued
Key Insights
The projected fair value for Fulgent Genetics is US$33.29 based on 2 Stage Free Cash Flow to Equity
Fulgent Genetics' US$22.56 share price signals that it might be 32% undervalued
Analyst price target for FLGT is US$29.33 which is 12% below our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Fulgent Genetics, Inc. (NASDAQ:FLGT) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for Fulgent Genetics
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$34.1m | US$35.7m | US$37.0m | US$38.3m | US$39.4m | US$40.6m | US$41.6m | US$42.7m | US$43.7m | US$44.8m |
Growth Rate Estimate Source | Est @ 5.41% | Est @ 4.47% | Est @ 3.82% | Est @ 3.36% | Est @ 3.04% | Est @ 2.81% | Est @ 2.66% | Est @ 2.55% | Est @ 2.47% | Est @ 2.42% |
Present Value ($, Millions) Discounted @ 6.0% | US$32.2 | US$31.8 | US$31.1 | US$30.4 | US$29.5 | US$28.6 | US$27.7 | US$26.8 | US$26.0 | US$25.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$289m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.0%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$45m× (1 + 2.3%) ÷ (6.0%– 2.3%) = US$1.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.2b÷ ( 1 + 6.0%)10= US$697m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$987m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$22.6, the company appears quite undervalued at a 32% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Fulgent Genetics as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.0%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Fulgent Genetics
Strength
Currently debt free.
Weakness
No major weaknesses identified for FLGT.
Opportunity
Forecast to reduce losses next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Trading below our estimate of fair value by more than 20%.
Threat
Not expected to become profitable over the next 3 years.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Fulgent Genetics, we've put together three important factors you should explore:
Risks: For example, we've discovered 1 warning sign for Fulgent Genetics that you should be aware of before investing here.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for FLGT's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
