Yahoo Finance A Look At The Fair Value Of GlaxoSmithKline plc (LON:GSK)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to forecast the attractiveness of GlaxoSmithKline plc (LSE:GSK) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after June 2018 then I highly recommend you check out the latest calculation for GlaxoSmithKline here.
What’s the value?
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I took the analyst consensus forecast of GSK’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.28%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of UK£19.43B. Keen to know how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how GSK’s earnings are expected to move in the future, which should give you an idea of GSK’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is UK£46.37B.
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 UK£65.80B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £13.39, which, compared to the current share price of £15.452, we see that GlaxoSmithKline is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For GSK, there are three relevant aspects you should further examine:
Financial Health: Does GSK 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 GSK’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of GSK? 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 GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
