Getinge AB's (STO:GETI B) Intrinsic Value Is Potentially 55% Above Its Share Price

By
Simply Wall St
Published
July 10, 2021
OM:GETI B
Source: Shutterstock

In this article we are going to estimate the intrinsic value of Getinge AB (STO:GETI B) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Getinge

The method

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF (SEK, Millions) kr2.87b kr3.84b kr4.39b kr5.06b kr5.53b kr5.89b kr6.17b kr6.38b kr6.53b kr6.65b
Growth Rate Estimate Source Analyst x7 Analyst x6 Analyst x3 Analyst x3 Est @ 9.24% Est @ 6.56% Est @ 4.69% Est @ 3.38% Est @ 2.47% Est @ 1.83%
Present Value (SEK, Millions) Discounted @ 4.6% kr2.7k kr3.5k kr3.8k kr4.2k kr4.4k kr4.5k kr4.5k kr4.4k kr4.3k kr4.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = kr41b

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 (0.3%) 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 4.6%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = kr6.7b× (1 + 0.3%) ÷ (4.6%– 0.3%) = kr155b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= kr155b÷ ( 1 + 4.6%)10= kr98b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is kr139b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of kr330, the company appears quite undervalued at a 35% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
OM:GETI B Discounted Cash Flow July 10th 2021

Important assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Getinge 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 0.914. 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.

Looking Ahead:

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. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Getinge, we've put together three additional aspects you should assess:

  1. Risks: For instance, we've identified 1 warning sign for Getinge that you should be aware of.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for GETI B's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. 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 OM every day. If you want to find the calculation for other stocks just search here.

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