Does the share price for The Cooper Companies Inc (NYSE:COO) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for Cooper Companies here.

Crunching the numbers

I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus estimates of COO’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.81%. 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 $1,945M. Want to understand how I calculated this value? Take a look at our detailed analysis here.

In the visual above, we see how how COO’s earnings are expected to move in the future, which should give you an idea of COO’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual 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 $6,153M.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $8,098M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $165.44, which, compared to the current share price of $234.66, we find that Cooper Companies is quite expensive and not available at a discount at this time.

Next Steps:

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. What is the reason for the share price to differ from the intrinsic value? For COO, I’ve compiled three essential factors you should further examine:

PS. Simply Wall St does a DCF calculation for every US 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.