Regeneron Pharmaceuticals, Inc.'s (NASDAQ:REGN) Intrinsic Value Is Potentially 81% Above Its Share Price

Key Insights

• The projected fair value for Regeneron Pharmaceuticals is US$2,143 based on 2 Stage Free Cash Flow to Equity
• Regeneron Pharmaceuticals is estimated to be 45% undervalued based on current share price of US$1,185
• The US$1,150 analyst price target for REGN is 46% less than our estimate of fair value

Does the August share price for Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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.

See our latest analysis for Regeneron Pharmaceuticals

The Calculation

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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$5.30b	US$5.86b	US$7.09b	US$8.15b	US$8.93b	US$9.60b	US$10.2b	US$10.7b	US$11.1b	US$11.5b
Growth Rate Estimate Source	Analyst x5	Analyst x5	Analyst x3	Analyst x3	Est @ 9.63%	Est @ 7.49%	Est @ 5.99%	Est @ 4.95%	Est @ 4.21%	Est @ 3.70%
Present Value ($, Millions) Discounted @ 6.3%	US$5.0k	US$5.2k	US$5.9k	US$6.4k	US$6.6k	US$6.7k	US$6.6k	US$6.6k	US$6.4k	US$6.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$62b

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 (2.5%) 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 6.3%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$12b× (1 + 2.5%) ÷ (6.3%– 2.5%) = US$312b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$312b÷ ( 1 + 6.3%)¹⁰= US$170b

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$231b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.2k, the company appears quite good value at a 45% 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.

The 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. 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 6.3%, which is based on a levered beta of 0.920. 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

Moving On:

Although the valuation of a company is important, 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 higher than the current share price? For Regeneron Pharmaceuticals, we've compiled three additional items you should explore:

1. Risks: For example, we've discovered 1 warning sign for Regeneron Pharmaceuticals that you should be aware of before investing here.
2. Future Earnings: How does REGN'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.
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.