An Intrinsic Calculation For Definitive Healthcare Corp. (NASDAQ:DH) Suggests It's 42% Undervalued

Definitive Healthcare Corp. -4.30%

Definitive Healthcare Corp.

DH

7.35

-4.30%

Key Insights

  • Definitive Healthcare's estimated fair value is US$17.53 based on 2 Stage Free Cash Flow to Equity
  • Definitive Healthcare is estimated to be 42% undervalued based on current share price of US$10.21
  • Our fair value estimate is 67% higher than Definitive Healthcare's analyst price target of US$10.50

How far off is Definitive Healthcare Corp. (NASDAQ:DH) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Definitive Healthcare

The Method

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. To start off with, we need to estimate 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$70.3m US$94.6m US$113.1m US$129.3m US$143.2m US$154.9m US$164.8m US$173.3m US$180.7m US$187.3m
Growth Rate Estimate Source Analyst x4 Analyst x3 Est @ 19.59% Est @ 14.38% Est @ 10.73% Est @ 8.18% Est @ 6.39% Est @ 5.14% Est @ 4.26% Est @ 3.65%
Present Value ($, Millions) Discounted @ 7.4% US$65.5 US$82.0 US$91.3 US$97.2 US$100 US$101 US$99.9 US$97.8 US$94.9 US$91.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$921m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$187m× (1 + 2.2%) ÷ (7.4%– 2.2%) = US$3.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.7b÷ ( 1 + 7.4%)10= US$1.8b

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$2.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$10.2, the company appears quite undervalued at a 42% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
NasdaqGS:DH Discounted Cash Flow December 29th 2023

Important 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 Definitive Healthcare 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 7.4%, which is based on a levered beta of 1.038. 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 Definitive Healthcare

Strength
  • Cash in surplus of total debt.
Weakness
  • No major weaknesses identified for DH.
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.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Definitive Healthcare, there are three further aspects you should further examine:

  1. Risks: For instance, we've identified 1 warning sign for Definitive Healthcare that you should be aware of.
  2. Future Earnings: How does DH'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.
  3. 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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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