Estimating The Fair Value Of IQVIA Holdings Inc (NYSE:IQV)

I am going to run you through how I calculated the intrinsic value of IQVIA Holdings Inc (NYSE:IQV) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in July 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for IQVIA Holdings

The method

I’m 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $1.13k $1.40k $1.49k $1.54k $1.79k
Source Analyst x6 Analyst x7 Analyst x6 Analyst x1 Extrapolated @ (16%, capped from 18.75%)
Present Value Discounted @ 11.12% $1.02k $1.13k $1.09k $1.01k $1.06k

Present Value of 5-year Cash Flow (PVCF)= US$5.30b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.1%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$1.79b × (1 + 2.9%) ÷ (11.1% – 2.9%) = US$22.53b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$22.53b ÷ ( 1 + 11.1%)5 = US$13.30b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$18.60b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $91.95. Relative to the current share price of $100.61, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NYSE:IQV Intrinsic Value July 4th 18
NYSE:IQV Intrinsic Value July 4th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at IQVIA Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.1%, which is based on a levered beta of 1.159. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For IQV, I’ve put together three fundamental factors you should further examine:

  1. Financial Health: Does IQV 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.
  2. Future Earnings: How does IQV’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of IQV? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.