How far off is Depomed Inc (NASDAQ:DEPO) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 January 2018 so be sure check the latest calculation for Depomed here.
What’s the value?
I use what is known as the 2-stage 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 start off, I use the analyst consensus forecast of DEPO’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 10.57%. This resulted in a present value of 5-year cash flow of $321.8M. Keen to know how I arrived at this number? Check out our detailed analysis here.
In the visual above, we see how how DEPO’s earnings are expected to move in the future, which should give you some color on DEPO’s outlook. Secondly, I determine 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 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 $717.1M.
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 $1,038.9M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $16.49, which, compared to the current share price of $8.59, we see that Depomed is quite undervalued at a 47.90% discount to what it is available for right now.
Next Steps:
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 DEPO, there are three relevant aspects you should look at:
PS. Simply Wall St does a DCF calculation for every US 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.