Advertisement
U.S. markets closed
  • S&P Futures

    5,183.25
    +15.75 (+0.30%)
     
  • Dow Futures

    38,328.00
    +90.00 (+0.24%)
     
  • Nasdaq Futures

    18,227.00
    +47.75 (+0.26%)
     
  • Russell 2000 Futures

    2,031.50
    +11.70 (+0.58%)
     
  • Crude Oil

    85.33
    -0.33 (-0.39%)
     
  • Gold

    2,372.60
    -1.50 (-0.06%)
     
  • Silver

    28.10
    -0.23 (-0.79%)
     
  • EUR/USD

    1.0650
    +0.0003 (+0.03%)
     
  • 10-Yr Bond

    4.4990
    -0.0770 (-1.68%)
     
  • Vix

    17.31
    +2.40 (+16.10%)
     
  • GBP/USD

    1.2456
    +0.0004 (+0.03%)
     
  • USD/JPY

    153.2720
    +0.0320 (+0.02%)
     
  • Bitcoin USD

    65,264.04
    +408.80 (+0.63%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,995.58
    +71.78 (+0.91%)
     
  • Nikkei 225

    39,523.55
    +80.95 (+0.21%)
     

Are Investors Undervaluing ClearPoint Neuro, Inc. (NASDAQ:CLPT) By 41%?

Key Insights

  • The projected fair value for ClearPoint Neuro is US$10.08 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$5.94 suggests ClearPoint Neuro is potentially 41% undervalued

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of ClearPoint Neuro, Inc. (NASDAQ:CLPT) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for ClearPoint Neuro

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

-US$13.1m

-US$3.50m

US$2.10m

US$3.91m

US$6.29m

US$9.01m

US$11.8m

US$14.4m

US$16.8m

US$18.8m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ 86.07%

Est @ 60.92%

Est @ 43.31%

Est @ 30.98%

Est @ 22.35%

Est @ 16.31%

Est @ 12.08%

Present Value ($, Millions) Discounted @ 6.9%

-US$12.3

-US$3.1

US$1.7

US$3.0

US$4.5

US$6.1

US$7.4

US$8.5

US$9.2

US$9.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$35m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$19m× (1 + 2.2%) ÷ (6.9%– 2.2%) = US$415m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$415m÷ ( 1 + 6.9%)10= US$213m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$248m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$5.9, the company appears quite undervalued at a 41% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at ClearPoint Neuro as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.9%, which is based on a levered beta of 0.928. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for ClearPoint Neuro

Strength

  • Debt is well covered by earnings.

Weakness

  • No major weaknesses identified for CLPT.

Opportunity

  • Forecast to reduce losses next year.

  • Trading below our estimate of fair value by more than 20%.

Threat

  • Debt is not well covered by operating cash flow.

  • Has less than 3 years of cash runway based on current free cash flow.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For ClearPoint Neuro, we've compiled three fundamental elements you should further research:

  1. Risks: For instance, we've identified 2 warning signs for ClearPoint Neuro that you should be aware of.

  2. Future Earnings: How does CLPT'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.

  3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Advertisement