In This Article:
How far off is Stryker Corporation (NYSE:SYK) 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. 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 May 2018 so be sure check the latest calculation for Stryker here.
What’s the value?
I will be using 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 SYK’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.68%. This resulted in a present value of 5-year cash flow of US$11.28B. Want to understand how I calculated this value? Read our detailed analysis here.
The infographic above illustrates how SYK’s earnings are expected to move in the future, which should give you an idea of SYK’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of US$39.83B.
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 US$51.10B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $136.74, which, compared to the current share price of $169.48, we find that Stryker is fair value, maybe slightly overvalued at the time of writing.
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 SYK, I’ve compiled three key factors you should look at:
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Financial Health: Does SYK 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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Future Earnings: How does SYK’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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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SYK? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!