A Look At The Fair Value Of MKS Instruments Inc (NASDAQ:MKSI)
How far off is MKS Instruments Inc (NASDAQ:MKSI) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in February 2018 so be sure check the latest calculation for MKS Instruments here.
Crunching the numbers
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. To begin, I use the analyst consensus estimates of MKSI’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 10.11%. 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 $1,466.1M. Want to know how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how MKSI’s earnings are expected to move going forward, which should give you an idea of MKSI’s outlook. Then, I determine 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 $4,419.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $5,885.2M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $108.39, which, compared to the current share price of $110, we find that MKS Instruments is fair value, maybe slightly overvalued and not available at a discount at this time.
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.
For MKSI, I’ve compiled three key factors you should further research:
1. Financial Health: Does MKSI 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.
2. Future Earnings: How does MKSI’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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MKSI? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks 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.
