Puma Biotechnology, Inc. (NASDAQ:PBYI) Shares Could Be 47% Below Their Intrinsic Value Estimate
Key Insights
Puma Biotechnology's estimated fair value is US$11.07 based on 2 Stage Free Cash Flow to Equity
Current share price of US$5.89 suggests Puma Biotechnology is potentially 47% undervalued
Industry average discount to fair value of 21% suggests Puma Biotechnology's peers are currently trading at a lower discount
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Puma Biotechnology, Inc. (NASDAQ:PBYI) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Puma Biotechnology
The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$46.0m | US$47.0m | US$42.0m | US$36.0m | US$30.0m | US$27.1m | US$25.5m | US$24.6m | US$24.1m | US$24.0m |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Est @ -9.61% | Est @ -6.04% | Est @ -3.54% | Est @ -1.79% | Est @ -0.57% |
Present Value ($, Millions) Discounted @ 6.8% | US$43.1 | US$41.2 | US$34.5 | US$27.7 | US$21.6 | US$18.3 | US$16.1 | US$14.5 | US$13.4 | US$12.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$243m
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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$24m× (1 + 2.3%) ÷ (6.8%– 2.3%) = US$547m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$547m÷ ( 1 + 6.8%)10= US$284m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$527m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$5.9, the company appears quite undervalued at a 47% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Puma Biotechnology 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 6.8%, which is based on a levered beta of 0.976. 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 Puma Biotechnology
Strength
Debt is well covered by cash flow.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Shareholders have been diluted in the past year.
Opportunity
Trading below our estimate of fair value by more than 20%.
Threat
No apparent threats visible for PBYI.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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. 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 Puma Biotechnology, we've put together three fundamental elements you should consider:
Risks: For instance, we've identified 5 warning signs for Puma Biotechnology (1 is a bit concerning) you should be aware of.
Future Earnings: How does PBYI'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: 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.
