AtriCure's estimated fair value is US$49.20 based on 2 Stage Free Cash Flow to Equity
AtriCure's US$34.83 share price signals that it might be 29% undervalued
The US$42.67 analyst price target for ATRC is 13% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of AtriCure, Inc. (NASDAQ:ATRC) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Method
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$11.0m
US$27.0m
US$41.9m
US$58.3m
US$74.7m
US$90.1m
US$103.7m
US$115.4m
US$125.4m
US$134.0m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ 55.01%
Est @ 39.26%
Est @ 28.23%
Est @ 20.51%
Est @ 15.11%
Est @ 11.33%
Est @ 8.68%
Est @ 6.82%
Present Value ($, Millions) Discounted @ 6.4%
US$10.3
US$23.8
US$34.7
US$45.5
US$54.8
US$62.0
US$67.1
US$70.2
US$71.7
US$72.0
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$512m
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 6.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.5b÷ ( 1 + 6.4%)10= US$1.9b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$2.4b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$34.8, the company appears a touch undervalued at a 29% 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
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 AtriCure 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 6.4%, which is based on a levered beta of 0.950. 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 AtriCure
Strength
Debt is well covered by earnings.
Balance sheet summary for ATRC.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Forecast to reduce losses next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Good value based on P/S ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Not expected to become profitable over the next 3 years.
Is ATRC well equipped to handle threats?
Moving On:
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. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For AtriCure, we've compiled three important aspects you should consider:
Risks: Every company has them, and we've spotted 2 warning signs for AtriCure you should know about.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ATRC's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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 NASDAQGM 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
AtriCure的估計公允價值爲49.20美元,基於兩階段的自由現金流對股東權益
AtriCure的34.83美元股價表明其可能被低估29%
ATRC的42.67美元分析師目標價比我們的公允價值估計低13%
在本文中,我們將通過預期未來現金流量並將其貼現到當天的價值來估算AtriCure, Inc. (納斯達克: ATRC)的內在價值。 我們的分析將採用貼現現金流量(DCF)模型。 信不信由你,跟隨我們的示例,你會發現並不難!
我們應該注意的是,估值的方法有很多種,就像DCF一樣,每種技術在特定的情況下都有其優點和缺點。對於那些熱愛股權分析的學習者來說,這裏的 Simply Wall St 分析模型可能是一些感興趣的內容。