Can this type of DCF model structure be used? Also, I'm looking more into the numbers I'm using at the moment as my target price seems too low, do any stand out as off? What type of assumptions are used in professional ER roles? Thanks in advance for any guidance that you can provide.
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Look up the mid-year convention, that will change your cash flows a bit.
More importantly, are your assumptions defensible?
20% growth in each year is pretty ambitious and then just dropping straight to 3% is pretty odd. I walked down the growth rates by 5% increments until I got to 5% and I hit the nail on the head with a share price of $70.51.
I have no idea what multiple Medtronic is trading at but I don't think it really matters. We use the multiple when it's more difficult to project cash flows but I doubt that's the case here. Using guidance and general intuition, you can use the GGM and likely will get a better result.
How do you determine good revenue growth assumptions for a company/what did you use for years 2016 - 2020 to arrive at that share price? Wasn't 100% sure what you meant in the second paragraph. For the medium perpetual growth rate under inputs, I updated it to 5%.
I will not use multiple at all in this case and just use the perpetual growth method. Any other inputs in the model that I should look more into?
Good question and that's really the fundamental issue with a DCF. I would read through the 10k and get to a point where you feel you could tell someone about their operations and their growth prospects. At that point, you will be able to really defend your growth assumptions.
The problem is that that can take a while to become that knowledgable. If you can get some projections from their 10k or from the guidance section on CapIQ, that would be your best bet.
I would advise you to think about how each piece of the model works together. Is 20% growth sustainable over the next 5 years? Maybe, but it's not going to drop down to 3% in perpetuity. That's why I stepped the growth down in increments.
EDIT: I went back and I got a little confused because I build my models a little differently. It seems like this company is pretty highly overvalued. Now the question is why? They've made a lot of acquisitions over the past year or so, so that could play into the overpricing. I have no real inclination as to why but my little research yielded that.
The D&A/sales went up significantly, that might be something to look into but it won't make a big difference in your share price value.
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