An Intrinsic Value Calculation For Thermo Fisher Scientific Inc (TMO) Shows Investors Are Overpaying
Does the share price for Thermo Fisher Scientific Inc (NYSE:TMO) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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. Also note that this article was written in November 2017 so be sure check the latest calculation for Thermo Fisher Scientific here.
Crunching the numbers
I use what is known as the 2-stage 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 perpetual stable growth rate. Firstly, I pulled together the analyst consensus forecast of TMO’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 10.14%. This resulted in a present value of 5-year cash flow of $15,229M. Want to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how TMO’s top and bottom lines are expected to move in the future, which should give you some color on TMO’s outlook. Now we need to 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 stable 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 $41,745M.
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 $56,974M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $142.08, which, compared to the current share price of $192.75, we see that Thermo Fisher Scientific is rather overvalued at the time of writing.
Next Steps:
Although the valuation of a company is important, 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 TMO, I’ve compiled three important factors you should further examine:
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.
