Stock Analysis
- Switzerland
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- Medical Equipment
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- SWX:MOVE
Medacta Group SA (VTX:MOVE) Shares Could Be 32% Above Their Intrinsic Value Estimate
Key Insights
- Medacta Group's estimated fair value is CHF95.33 based on 2 Stage Free Cash Flow to Equity
- Current share price of CHF126 suggests Medacta Group is potentially 32% overvalued
- Our fair value estimate is 32% lower than Medacta Group's analyst price target of €140
Does the September share price for Medacta Group SA (VTX:MOVE) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Medacta Group
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (€, Millions) | €38.4m | €50.8m | €60.0m | €67.6m | €73.7m | €78.4m | €81.9m | €84.6m | €86.6m | €88.1m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ 18.07% | Est @ 12.73% | Est @ 8.98% | Est @ 6.36% | Est @ 4.53% | Est @ 3.25% | Est @ 2.35% | Est @ 1.72% |
Present Value (€, Millions) Discounted @ 4.2% | €36.8 | €46.8 | €53.0 | €57.3 | €59.9 | €61.2 | €61.3 | €60.8 | €59.7 | €58.2 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €555m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 4.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €88m× (1 + 0.3%) ÷ (4.2%– 0.3%) = €2.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €2.2b÷ ( 1 + 4.2%)10= €1.5b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €2.0b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CHF126, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Medacta Group 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 accounts for debt. In this calculation we've used 4.2%, which is based on a levered beta of 0.964. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Medacta Group
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Swiss market.
- Revenue is forecast to grow slower than 20% per year.
Looking Ahead:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Medacta Group, we've compiled three essential items you should look at:
- Risks: Every company has them, and we've spotted 1 warning sign for Medacta Group you should know about.
- Future Earnings: How does MOVE'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About SWX:MOVE
Medacta Group
Develops, manufactures, and distributes orthopedic and neurosurgical medical devices Europe, North America, the Asia-Pacific, and internationally.