Stock Analysis
- Germany
- /
- Life Sciences
- /
- XTRA:1SXP
Is There An Opportunity With SCHOTT Pharma AG & Co. KGaA's (ETR:1SXP) 31% Undervaluation?
Key Insights
- SCHOTT Pharma KGaA's estimated fair value is €47.81 based on 2 Stage Free Cash Flow to Equity
- Current share price of €33.14 suggests SCHOTT Pharma KGaA is potentially 31% undervalued
- The €34.21 analyst price target for 1SXP is 28% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of SCHOTT Pharma AG & Co. KGaA (ETR:1SXP) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for SCHOTT Pharma KGaA
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (€, Millions) | €37.5m | €91.0m | €108.6m | €163.3m | €205.9m | €244.0m | €276.2m | €302.4m | €323.2m | €339.5m |
Growth Rate Estimate Source | Analyst x4 | Analyst x3 | Analyst x3 | Analyst x2 | Est @ 26.10% | Est @ 18.51% | Est @ 13.20% | Est @ 9.48% | Est @ 6.88% | Est @ 5.06% |
Present Value (€, Millions) Discounted @ 4.6% | €35.9 | €83.1 | €94.7 | €136 | €164 | €186 | €201 | €210 | €215 | €216 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €1.5b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 (0.8%) 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 4.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €340m× (1 + 0.8%) ÷ (4.6%– 0.8%) = €8.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €8.9b÷ ( 1 + 4.6%)10= €5.7b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €7.2b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of €33.1, the company appears quite undervalued at a 31% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 SCHOTT Pharma KGaA 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 4.6%, which is based on a levered beta of 0.932. 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 SCHOTT Pharma KGaA
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Life Sciences market.
- Annual revenue is forecast to grow faster than the German market.
- Trading below our estimate of fair value by more than 20%.
- Annual earnings are forecast to grow slower than the German market.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For SCHOTT Pharma KGaA, we've compiled three fundamental factors you should look at:
- Risks: You should be aware of the 1 warning sign for SCHOTT Pharma KGaA we've uncovered before considering an investment in the company.
- Future Earnings: How does 1SXP'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA every day. If you want to find the calculation for other stocks 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About XTRA:1SXP
SCHOTT Pharma KGaA
Develops, manufactures, and sells drug containment solutions and delivery systems for injectable drugs for pharmaceutical, biotechnology, and life science industries worldwide.