Is There An Opportunity With ACADIA Pharmaceuticals Inc’s (NASDAQ:ACAD) 40.91% Undervaluation?
I am going to run you through how I calculated the intrinsic value of ACADIA Pharmaceuticals Inc (NASDAQ:ACAD) using the discounted cash flow (DCF) method. 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. Also note that this article was written in January 2018 so be sure check the latest calculation for ACADIA Pharmaceuticals here.
Is ACAD fairly valued?
I’ve used the 2-stage growth 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 use the analyst consensus estimates of ACAD’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 10.67%. This resulted in a present value of 5-year cash flow of $849.0M. Want to know how I calculated this value? Check out our detailed analysis here.
The infographic above illustrates how ACAD’s earnings are expected to move going forward, which should give you an idea of ACAD’s outlook. Secondly, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. The present value of the terminal value after discounting it back five years is $5,547.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $6,396.7M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $51.50, which, compared to the current share price of $30.43, we find that ACADIA Pharmaceuticals is quite good value at a 40.91% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation 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 ACAD, I’ve compiled three pertinent factors you should look at:
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.
