I am going to run you through how I calculated the intrinsic value of Universal Health Services Inc (NYSE:UHS) 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 December 2017 then I highly recommend you check out the latest calculation for Universal Health Services here.
Crunching the numbers
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I pulled together the analyst consensus estimates of UHS’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. 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 $2,946.1M. Want to understand how I calculated this value? Read our detailed analysis here.
The infographic above illustrates how UHS’s top and bottom lines are expected to move going forward, which should give you some color on UHS’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. 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 $10,301.5M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $13,247.6M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $139.58, which, compared to the current share price of $112.78, we find that Universal Health Services is about right, perhaps slightly undervalued at a 19.20% discount to what it is available for right now.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For UHS, I’ve compiled three important factors you should further research:
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.