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.
主要見解
基於2階段自由現金流至股權的Labcorp Holdings的預測公允值爲430美元。
Labcorp Holdings的226美元股價表明可能被低估了47%。
LH的248美元分析師目標價比我們的公允值估計低42%。
Labcorp Holdings Inc. (NYSE:LH)離其內在價值還有多遠?根據最新的財務數據,我們將通過估計公司未來的現金流,並將其貼現到現值來判斷該股票是否定價合理。我們的分析將採用貼現現金流量(DCF)模型。類似這樣的模型對於普通人來說可能超出了理解範圍,但是它們非常容易理解。
我們普遍認爲一家公司的價值是其未來所產生的現金的現值總和。然而,DCF僅是衆多估值指標之一,並且並不是不帶缺陷。如果您想了解更多關於折現現金流的信息,可以在 Simply Wall St 分析模型中詳細閱讀其背後的理論。