An Intrinsic Calculation For Genesis Healthcare Inc (NYSE:GEN) Shows It’s 38% Undervalued
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Genesis Healthcare Inc (NYSE:GEN) 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 March 2018 then I highly recommend you check out the latest calculation for Genesis Healthcare here.
What’s the value?
I use what is known as the 2-stage 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. Generally I like to use analyst consensus estimates for free cash flow, but given that GEN has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these figures at the rate of 17.53%. This resulted in a present value of 5-year cash flow of US$186.23M. Want to understand how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how GEN’s earnings are expected to move in the future, which should give you some color on GEN’s outlook. Now we need to 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 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 US$215.68M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$401.91M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $2.57, which, compared to the current share price of $1.59, we see that Genesis Healthcare is quite good value at a 38.12% 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. What is the reason for the share price to differ from the intrinsic value? For GEN, I’ve put together three fundamental aspects you should further examine:
Financial Health: Does GEN 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 GEN’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 GEN? 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.
