Sonic Healthcare Limited (ASX:SHL) Investors Are Paying Above The Intrinsic Value
In this article I am going to calculate the intrinsic value of Sonic Healthcare Limited (ASX:SHL) using the discounted cash flows (DCF) model. 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. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Sonic Healthcare here.
What’s the value?
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I took the analyst consensus forecast of SHL’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.55%. This resulted in a present value of 5-year cash flow of AU$2.01B. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how SHL’s earnings are expected to move in the future, which should give you an idea of SHL’s outlook. Now we need to calculate 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 stable 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 AU$5.37B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$7.38B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$17.38, which, compared to the current share price of A$24.11, we find that Sonic Healthcare is quite expensive and not available at a discount at this time.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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 SHL, I’ve put together three fundamental aspects you should look at:
Financial Health: Does SHL 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 SHL’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 SHL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every AU stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.
