How far off is Five Prime Therapeutics Inc (NASDAQ:FPRX) 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. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Five Prime Therapeutics here.
Crunching the numbers
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 begin, I took the analyst consensus estimates of FPRX’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.31%. This resulted in a present value of 5-year cash flow of $177.7M. Want to know how I arrived at this number? Read our detailed analysis here.
The graph above shows how FPRX’s earnings are expected to move going forward, which should give you some color on FPRX’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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 $924.8M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,102.5M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $32.42, which, compared to the current share price of $18.73, we find that Five Prime Therapeutics is quite good value at a 42.22% discount to what it is available for right now.
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 FPRX, there are three essential factors you should look at:
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1. Financial Health: Does FPRX 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.
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2. Future Earnings: How does FPRX’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.
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2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of FPRX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!