An Intrinsic Value Calculation For Amphastar Pharmaceuticals Inc (NASDAQ:AMPH) Shows It’s 39.91% Undervalued
I am going to run you through how I calculated the intrinsic value of Amphastar Pharmaceuticals Inc (NASDAQ:AMPH) using the discounted cash flow (DCF) method. 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 January 2018 then I highly recommend you check out the latest calculation for Amphastar Pharmaceuticals here.
Crunching the numbers
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I took the analyst consensus estimates of AMPH’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.49%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $250.2M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how AMPH’s earnings are expected to move in the future, which should give you an idea of AMPH’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. Discounting the terminal value back five years gives us a present value of $1,222.1M.
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 $1,472.2M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $32.02, which, compared to the current share price of $19.24, we find that Amphastar Pharmaceuticals is quite good value at a 39.91% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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 AMPH, I’ve compiled three key aspects you should further research:
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.
