In this article I am going to calculate the intrinsic value of Array BioPharma Inc (NASDAQ:ARRY) 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 April 2018 so be sure check the latest calculation for Array BioPharma here.
Is ARRY fairly valued?
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I took the analyst consensus estimates of ARRY’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.41%. This resulted in a present value of 5-year cash flow of US$574.43M. Keen to know how I calculated this value? Read our detailed analysis here.
The infographic above illustrates how ARRY’s top and bottom lines are expected to move in the future, which should give you some color on ARRY’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 US$4.11B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$4.68B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $22.54, which, compared to the current share price of $15.26, we see that Array BioPharma is quite undervalued at a 32.30% discount to what it is available for right now.
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 ARRY, I’ve put together three fundamental factors you should further examine:
- Financial Health: Does ARRY 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.
- Future Earnings: How does ARRY’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.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ARRY? 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.