Stock Analysis

IQVIA Holdings Inc.'s (NYSE:IQV) Intrinsic Value Is Potentially 43% Above Its Share Price

NYSE:IQV
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Key Insights

  • IQVIA Holdings' estimated fair value is US$306 based on 2 Stage Free Cash Flow to Equity
  • IQVIA Holdings is estimated to be 30% undervalued based on current share price of US$214
  • Our fair value estimate is 24% higher than IQVIA Holdings' analyst price target of US$247

In this article we are going to estimate the intrinsic value of IQVIA Holdings Inc. (NYSE:IQV) by estimating the company's future cash flows and discounting them to their present value. This will be done using 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 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for IQVIA Holdings

What's The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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, 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$1.76b US$2.09b US$2.39b US$3.35b US$3.74b US$4.03b US$4.27b US$4.48b US$4.66b US$4.82b
Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x5 Analyst x2 Analyst x2 Est @ 7.76% Est @ 6.06% Est @ 4.88% Est @ 4.05% Est @ 3.47%
Present Value ($, Millions) Discounted @ 8.4% US$1.6k US$1.8k US$1.9k US$2.4k US$2.5k US$2.5k US$2.4k US$2.4k US$2.3k US$2.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$22b

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$4.8b× (1 + 2.1%) ÷ (8.4%– 2.1%) = US$78b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$78b÷ ( 1 + 8.4%)10= US$35b

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$57b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$214, the company appears quite undervalued at a 30% 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.

dcf
NYSE:IQV Discounted Cash Flow June 27th 2023

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 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 IQVIA Holdings 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 8.4%, which is based on a levered beta of 1.059. 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 IQVIA Holdings

Strength
  • Debt is well covered by earnings.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Debt is not well covered by operating cash flow.
  • Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 IQVIA Holdings, there are three pertinent items you should further examine:

  1. Risks: For example, we've discovered 2 warning signs for IQVIA Holdings (1 can't be ignored!) that you should be aware of before investing here.
  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 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 NYSE every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

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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.