OraSure Technologies, Inc.'s (NASDAQ:OSUR) Intrinsic Value Is Potentially 57% Above Its Share Price
Key Insights
OraSure Technologies' estimated fair value is US$9.30 based on 2 Stage Free Cash Flow to Equity
OraSure Technologies' US$5.94 share price signals that it might be 36% undervalued
The US$6.44 analyst price target for OSUR is 31% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of OraSure Technologies, Inc. (NASDAQ:OSUR) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for OraSure Technologies
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$26.8m | US$30.3m | US$33.4m | US$35.9m | US$38.1m | US$39.9m | US$41.5m | US$42.9m | US$44.3m | US$45.5m |
Growth Rate Estimate Source | Analyst x2 | Est @ 13.41% | Est @ 10.02% | Est @ 7.65% | Est @ 5.99% | Est @ 4.82% | Est @ 4.01% | Est @ 3.44% | Est @ 3.04% | Est @ 2.76% |
Present Value ($, Millions) Discounted @ 7.4% | US$24.9 | US$26.3 | US$26.9 | US$27.0 | US$26.6 | US$26.0 | US$25.2 | US$24.2 | US$23.3 | US$22.2 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$253m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$45m× (1 + 2.1%) ÷ (7.4%– 2.1%) = US$876m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$876m÷ ( 1 + 7.4%)10= US$429m
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$681m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$5.9, the company appears quite good value at a 36% discount to where the stock price trades currently. 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 OraSure Technologies 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 7.4%, which is based on a levered beta of 0.892. 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.
SWOT Analysis for OraSure Technologies
Strength
Currently debt free.
Weakness
No major weaknesses identified for OSUR.
Opportunity
Trading below our estimate of fair value by more than 20%.
Significant insider buying over the past 3 months.
Threat
Annual earnings are forecast to decline for the next 3 years.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Can we work out why the company is trading at a discount to intrinsic value? For OraSure Technologies, we've compiled three fundamental aspects you should further examine:
Risks: For example, we've discovered 2 warning signs for OraSure Technologies (1 can't be ignored!) that you should be aware of before investing here.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for OSUR's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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 NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
