I am going to run you through how I calculated the intrinsic value of Harvard Bioscience Inc (NASDAQ:HBIO) 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 March 2018 then I highly recommend you check out the latest calculation for Harvard Bioscience here.
Is HBIO fairly valued?
We are going to use a two-stage DCF 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 took the analyst consensus forecast of HBIO’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.01%. 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 US$31.03M. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how HBIO’s earnings are expected to move going forward, which should give you an idea of HBIO’s outlook. Next, I 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. Discounting the terminal value back five years gives us a present value of US$87.02M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$118.05M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $3.38, which, compared to the current share price of $4.8, we see that Harvard Bioscience is rather overvalued at the time of writing.
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 HBIO, there are three fundamental factors you should look at:
- Financial Health: Does HBIO 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 HBIO’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 HBIO? 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.