Is There An Opportunity With Regeneron Pharmaceuticals, Inc.'s (NASDAQ:REGN) 47% Undervaluation?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Regeneron Pharmaceuticals fair value estimate is US$1,774
• Current share price of US$944 suggests Regeneron Pharmaceuticals is potentially 47% undervalued
• Analyst price target for REGN is US$1,026 which is 42% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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 Regeneron Pharmaceuticals

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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$4.50b	US$4.73b	US$5.48b	US$6.46b	US$7.29b	US$7.91b	US$8.43b	US$8.88b	US$9.27b	US$9.62b
Growth Rate Estimate Source	Analyst x7	Analyst x7	Analyst x6	Analyst x4	Analyst x3	Est @ 8.48%	Est @ 6.62%	Est @ 5.32%	Est @ 4.41%	Est @ 3.78%
Present Value ($, Millions) Discounted @ 6.2%	US$4.2k	US$4.2k	US$4.6k	US$5.1k	US$5.4k	US$5.5k	US$5.5k	US$5.5k	US$5.4k	US$5.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$51b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 6.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$9.6b× (1 + 2.3%) ÷ (6.2%– 2.3%) = US$254b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$254b÷ ( 1 + 6.2%)¹⁰= US$140b

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 US$191b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$944, the company appears quite undervalued at a 47% discount to where the stock price trades currently. 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 Regeneron Pharmaceuticals 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 6.2%, which is based on a levered beta of 0.842. 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 Regeneron Pharmaceuticals

Next Steps:

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. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Regeneron Pharmaceuticals, we've compiled three relevant factors you should consider:

1. Risks: As an example, we've found 1 warning sign for Regeneron Pharmaceuticals that you need to consider before investing here.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for REGN'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. 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.

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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.