A Look At The Fair Value Of Straumann Holding AG (VTX:STMN)
Using the 2 Stage Free Cash Flow to Equity, Straumann Holding fair value estimate is CHF87.37
Straumann Holding's CHF105 share price indicates it is trading at similar levels as its fair value estimate
The CHF126 analyst price target for STMN is 44% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Straumann Holding AG (VTX:STMN) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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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 discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CHF, Millions)
CHF478.9m
CHF540.7m
CHF598.3m
CHF534.4m
CHF592.6m
CHF600.1m
CHF606.1m
CHF611.1m
CHF615.5m
CHF619.3m
Growth Rate Estimate Source
Analyst x8
Analyst x9
Analyst x7
Analyst x1
Analyst x1
Est @ 1.26%
Est @ 1.01%
Est @ 0.83%
Est @ 0.71%
Est @ 0.62%
Present Value (CHF, Millions) Discounted @ 4.6%
CHF458
CHF494
CHF522
CHF446
CHF473
CHF457
CHF442
CHF426
CHF410
CHF394
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CHF4.5b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (0.4%) 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 4.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CHF619m× (1 + 0.4%) ÷ (4.6%– 0.4%) = CHF15b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF15b÷ ( 1 + 4.6%)10= CHF9.4b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF14b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CHF105, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 Straumann Holding 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 4.6%, which is based on a levered beta of 0.971. 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.
See our latest analysis for Straumann Holding
Strength
Debt is not viewed as a risk.
Weakness
Earnings growth over the past year underperformed the Medical Equipment industry.
Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
Opportunity
Annual earnings are forecast to grow faster than the Swiss market.
Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
Revenue is forecast to grow slower than 20% per year.
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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Straumann Holding, we've put together three fundamental factors you should consider:
Financial Health: Does STMN 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 STMN'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SWX every day. If you want to find the calculation for other stocks just search here.
—
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—
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.
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