U.S. Markets close in 4 hrs 32 mins
  • S&P 500

    3,775.59
    -19.95 (-0.53%)
     
  • Dow 30

    30,854.47
    -137.05 (-0.44%)
     
  • Nasdaq

    13,042.00
    -70.64 (-0.54%)
     
  • Russell 2000

    2,113.70
    -41.64 (-1.93%)
     
  • Crude Oil

    51.95
    -1.62 (-3.02%)
     
  • Gold

    1,824.00
    -27.40 (-1.48%)
     
  • Silver

    24.69
    -1.11 (-4.31%)
     
  • EUR/USD

    1.2102
    -0.0062 (-0.5083%)
     
  • 10-Yr Bond

    1.0950
    -0.0340 (-3.01%)
     
  • Vix

    24.44
    +1.19 (+5.12%)
     
  • GBP/USD

    1.3596
    -0.0044 (-0.3209%)
     
  • USD/JPY

    103.7880
    -0.0540 (-0.0520%)
     
  • BTC-USD

    35,847.60
    -1,991.04 (-5.26%)
     
  • CMC Crypto 200

    685.32
    -49.82 (-6.78%)
     
  • FTSE 100

    6,723.61
    -78.35 (-1.15%)
     
  • Nikkei 225

    28,519.18
    -179.08 (-0.62%)
     

A Look At The Intrinsic Value Of MEDNAX, Inc. (NYSE:MD)

Simply Wall St
·6 min read

Today we will run through one way of estimating the intrinsic value of MEDNAX, Inc. (NYSE:MD) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for MEDNAX

The model

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$145.4m

US$176.0m

US$142.3m

US$124.1m

US$113.9m

US$108.1m

US$104.9m

US$103.5m

US$103.2m

US$103.6m

Growth Rate Estimate Source

Analyst x4

Analyst x1

Est @ -19.16%

Est @ -12.75%

Est @ -8.26%

Est @ -5.11%

Est @ -2.91%

Est @ -1.37%

Est @ -0.3%

Est @ 0.46%

Present Value ($, Millions) Discounted @ 9.1%

US$133

US$148

US$110

US$87.7

US$73.7

US$64.1

US$57.1

US$51.6

US$47.2

US$43.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$815m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 9.1%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$104m× (1 + 2.2%) ÷ (9.1%– 2.2%) = US$1.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.5b÷ ( 1 + 9.1%)10= US$646m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$1.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$20.1, the company appears around fair value at the time of writing. 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 MEDNAX 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 9.1%, which is based on a levered beta of 1.143. 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.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. For MEDNAX, there are three additional factors you should consider:

  1. Risks: To that end, you should learn about the 3 warning signs we've spotted with MEDNAX (including 1 which can't be ignored) .

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MD's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

This article by Simply Wall St is general in nature. 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.

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