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A Look At The Fair Value Of Boston Scientific Corporation (NYSE:BSX)
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Boston Scientific fair value estimate is US$80.31
- Current share price of US$79.58 suggests Boston Scientific is potentially trading close to its fair value
- Analyst price target for BSX is US$87.17, which is 8.5% above our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Boston Scientific Corporation (NYSE:BSX) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Boston Scientific
The Method
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$3.01b | US$3.88b | US$4.31b | US$4.70b | US$5.01b | US$5.27b | US$5.50b | US$5.71b | US$5.91b | US$6.10b |
Growth Rate Estimate Source | Analyst x5 | Analyst x4 | Analyst x2 | Analyst x2 | Est @ 6.42% | Est @ 5.24% | Est @ 4.42% | Est @ 3.84% | Est @ 3.44% | Est @ 3.16% |
Present Value ($, Millions) Discounted @ 6.5% | US$2.8k | US$3.4k | US$3.6k | US$3.7k | US$3.7k | US$3.6k | US$3.5k | US$3.5k | US$3.4k | US$3.3k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$34b
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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$6.1b× (1 + 2.5%) ÷ (6.5%– 2.5%) = US$157b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$157b÷ ( 1 + 6.5%)10= US$84b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$118b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$79.6, the company appears about fair value at a 0.9% 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.
The Assumptions
Now 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 Boston Scientific 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 6.5%, which is based on a levered beta of 0.965. 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 Boston Scientific
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- No major weaknesses identified for BSX.
- Annual earnings are forecast to grow faster than the American market.
- Current share price is below our estimate of fair value.
- Revenue is forecast to grow slower than 20% per year.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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. For Boston Scientific, there are three important aspects you should further examine:
- Financial Health: Does BSX 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.
- Future Earnings: How does BSX'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 American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're here to simplify it.
Discover if Boston Scientific might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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 NYSE:BSX
Boston Scientific
Develops, manufactures, and markets medical devices for use in various interventional medical specialties worldwide.
Excellent balance sheet with reasonable growth potential.