How far is Omnicell, Inc. (NASDAQ: OMCL) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by projecting its future cash flows and then discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it’s not too hard to follow, as you will see in our example!
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 196.1 million||US $ 202.5 million||US $ 187.7 million||$ 223.5 million||US $ 230.1 million||US $ 236.1 million||US $ 241.9 million||US $ 247.4 million||$ 252.8 million||US $ 258.2 million|
|Source of growth rate estimate||Analyst x5||Analyst x3||Analyst x1||Analyst x1||Est @ 2.92%||East @ 2.63%||East @ 2.43%||East @ 2.29%||Est @ 2.19%||Is @ 2.12%|
|Present value (in millions of dollars) discounted at 5.8%||US $ 185||$ 181||US $ 158||$ 178||US $ 173||US $ 168||163 USD||157 USD||US $ 152||$ 147|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.7 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 5.8%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 258 million × (1 + 2.0%) ÷ (5.8% to 2.0%) = US $ 6.8 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= 6.8 billion US dollars ÷ (1 + 5.8%)ten= US $ 3.9 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 5.5 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 158, the company appears slightly overvalued at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
NasdaqGS: OMCL Discounted Cash Flow October 11, 2021
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Omnicell as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 5.8%, which is based on a leveraged beta of 0.879. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. The DCF model is not a perfect equity valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price exceeds intrinsic value? For Omnicell, we’ve compiled three essential factors to consider:
- Risks: For example, we discovered 2 warning signs for Omnicell which you should know before investing here.
- Future benefits: How does OCLL’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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