Investors Are Undervaluing Cara Therapeutics Inc (NASDAQ:CARA) By 26%
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Cara Therapeutics Inc (NASDAQ:CARA) 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 May 2018 then I highly recommend you check out the latest calculation for Cara Therapeutics 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. Firstly, I took the analyst consensus estimates of CARA’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.48%. This resulted in a present value of 5-year cash flow of -US$161.68M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how CARA’s top and bottom lines are expected to move in the future, which should give you some color on CARA’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable 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. After discounting the terminal value back five years, the present value becomes US$675.80M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$514.11M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $15.72, which, compared to the current share price of $11.6, we find that Cara Therapeutics is about right, perhaps slightly undervalued at a 26.22% 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 CARA, there are three fundamental aspects you should look at:
Financial Health: Does CARA 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 CARA’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 CARA? 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.
