Straumann Holding AG (VTX:STMN) Investors Are Paying Above The Intrinsic Value

Terrence Jolly

Updated Tue, Sep 25, 2018, 11:42 PM

How far off is Straumann Holding AG (VTX:STMN) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 and its not September 2018 then I highly recommend you check out the latest calculation for Straumann Holding by following the link below.

View our latest analysis for Straumann Holding

Is STMN fairly valued?

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 begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (CHF, Millions)	CHF285.52	CHF359.91	CHF435.80	CHF501.50	CHF565.85
Source	Analyst x12	Analyst x10	Analyst x5	Analyst x4	Est @ 12.83%
Present Value Discounted @ 8.74%	CHF262.56	CHF304.37	CHF338.92	CHF358.66	CHF372.14

Present Value of 5-year Cash Flow (PVCF)= CHF1.64b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (3.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.7%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = CHF565.9m × (1 + 3.7%) ÷ (8.7% – 3.7%) = CHF11.66b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CHF11.66b ÷ ( 1 + 8.7%)⁵ = CHF7.67b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CHF9.31b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of CHF588.62. Relative to the current share price of CHF740.5, the stock is fair value, maybe slightly overvalued at the time of writing.

SWX:STMN Intrinsic Value Export September 26th 18

Important 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Straumann Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.7%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 STMN, there are three fundamental aspects you should look at:

Financial Health: Does STMN 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 STMN’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 STMN? 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 CH stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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