STADA Arzneimittel Aktiengesellschaft (FRA:SAZ) Investors Are Paying Above The Intrinsic Value
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of STADA Arzneimittel Aktiengesellschaft (DB:SAZ) as an investment opportunity. 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 March 2018 so be sure check the latest calculation for STADA Arzneimittel here.
What’s the value?
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. Firstly, I use the analyst consensus forecast of SAZ’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.13%. This resulted in a present value of 5-year cash flow of €872.15M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how SAZ’s top and bottom lines are expected to move going forward, which should give you an idea of SAZ’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. 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. After discounting the terminal value back five years, the present value becomes €2.82B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €3.69B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €59.29, which, compared to the current share price of €85.58, we see that STADA Arzneimittel is rather overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, 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 SAZ, there are three relevant factors you should further examine:
Financial Health: Does SAZ 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 SAZ’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 SAZ? 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 DB 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.
