The projected fair value for Labcorp Holdings is US$430 based on 2 Stage Free Cash Flow to Equity
Labcorp Holdings' US$226 share price signals that it might be 47% undervalued
The US$248 analyst price target for LH is 42% less than our estimate of fair value
How far off is Labcorp Holdings Inc. (NYSE:LH) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$1.14b
US$1.19b
US$1.24b
US$1.28b
US$1.32b
US$1.36b
US$1.40b
US$1.44b
US$1.48b
US$1.52b
Growth Rate Estimate Source
Analyst x1
Est @ 4.67%
Est @ 4.02%
Est @ 3.56%
Est @ 3.24%
Est @ 3.02%
Est @ 2.86%
Est @ 2.76%
Est @ 2.68%
Est @ 2.63%
Present Value ($, Millions) Discounted @ 5.9%
US$1.1k
US$1.1k
US$1.0k
US$1.0k
US$996
US$969
US$942
US$914
US$887
US$860
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$9.8b
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 5.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$46b÷ ( 1 + 5.9%)10= US$26b
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$36b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$226, the company appears quite undervalued at a 47% 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
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Labcorp 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 5.9%, which is based on a levered beta of 0.814. 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 Labcorp Holdings
Strength
Debt is well covered by earnings and cashflows.
Dividends are covered by earnings and cash flows.
Dividend information for LH.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Trading below our estimate of fair value by more than 20%.
Threat
Annual revenue is forecast to grow slower than the American market.
What else are analysts forecasting for LH?
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Labcorp Holdings, we've compiled three pertinent elements you should look at:
Risks: As an example, we've found 4 warning signs for Labcorp Holdings that you need to consider before investing here.
Future Earnings: How does LH'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
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.
主要见解
基于2阶段自由现金流至股权的Labcorp Holdings的预测公允值为430美元。
Labcorp Holdings的226美元股价表明可能被低估了47%。
LH的248美元分析师目标价比我们的公允值估计低42%。
Labcorp Holdings Inc. (NYSE:LH)离其内在价值还有多远?根据最新的财务数据,我们将通过估计公司未来的现金流,并将其贴现到现值来判断该股票是否定价合理。我们的分析将采用贴现现金流量(DCF)模型。类似这样的模型对于普通人来说可能超出了理解范围,但是它们非常容易理解。
我们普遍认为一家公司的价值是其未来所产生的现金的现值总和。然而,DCF仅是众多估值指标之一,并且并不是不带缺陷。如果您想了解更多关于折现现金流的信息,可以在 Simply Wall St 分析模型中详细阅读其背后的理论。