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A Look At The Fair Value Of Bio-Rad Laboratories, Inc. (NYSE:BIO)

Key Insights

  • The projected fair value for Bio-Rad Laboratories is US$452 based on 2 Stage Free Cash Flow to Equity

  • Bio-Rad Laboratories' US$468 share price indicates it is trading at similar levels as its fair value estimate

  • Our fair value estimate is 25% lower than Bio-Rad Laboratories' analyst price target of US$606

Does the March share price for Bio-Rad Laboratories, Inc. (NYSE:BIO) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. There's really not all that much to it, even though it might appear quite complex.

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. 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.

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See our latest analysis for Bio-Rad Laboratories

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 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) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$483.7m

US$576.6m

US$663.9m

US$728.3m

US$782.3m

US$827.7m

US$866.5m

US$900.3m

US$930.4m

US$958.0m

Growth Rate Estimate Source

Analyst x2

Analyst x3

Analyst x2

Est @ 9.69%

Est @ 7.41%

Est @ 5.81%

Est @ 4.69%

Est @ 3.90%

Est @ 3.35%

Est @ 2.97%

Present Value ($, Millions) Discounted @ 7.7%

US$449

US$497

US$532

US$542

US$541

US$531

US$517

US$499

US$479

US$458

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$5.0b

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$958m× (1 + 2.1%) ÷ (7.7%– 2.1%) = US$17b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$17b÷ ( 1 + 7.7%)10= US$8.3b

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$13b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$468, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Bio-Rad Laboratories 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 7.7%, which is based on a levered beta of 0.942. 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 Bio-Rad Laboratories

Strength

  • Debt is not viewed as a risk.

Weakness

  • Expensive based on P/S ratio and estimated fair value.

Opportunity

  • Expected to breakeven next year.

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

Threat

  • No apparent threats visible for BIO.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for 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. For Bio-Rad Laboratories, there are three relevant aspects you should assess:

  1. Risks: We feel that you should assess the 1 warning sign for Bio-Rad Laboratories we've flagged before making an investment in the company.

  2. Future Earnings: How does BIO'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. 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.

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