Can a company's stock be undervalued by $ 340 a share? Seems a bit impossible to me

So I being working on a case study I'm planning to present to an Alumni and after doing a dcf I with the perpetuity method using a 2 % growth rate in line with inflation and a 8.2 % wacc I get a share price of $389.28 and by doing a ebitda multiple of 12x which is in line with the industry according to the comps I get a share price of $160.17. Which is still high but looks more reasonable that the first choice. so is there a possible for such things to happen or did I made a mathematical mistake in my projections most of the drivers for the model had been pull from ER reports.

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Comments (8)

Sep 18, 2014

edit: read this as undervalued "at" $340 a share, not "by."

if the stock price is very high it's certainly possible, but if you're talking US stocks, there aren't many that even trade that high. if you're looking at berkshire hathaway class A, $340 added to the current price would only be 0.16% upside, so yeah in that case it's possible, but I'm cherry picking there.

Sep 18, 2014

could be a bunch of different things, do your revenue growth assumptions make any sense?

Sep 18, 2014

So the share price is $50 now? Something is definitely wrong - those two per shr numbers shouldn't be that different from each other. Couple things you can do to check.

Put your terminal value over your terminal year EBITDA. What's the multiple? I'd bet it's way too high. Fix your cash flows or your terminal assumptions so it's reasonable

What's your NPV / TEV multiple of 2015 ebitda? Does it make sense?

What's your 2015 OCF yield (2015 OCF / your calculated NPV plus net cash)? Does it make sense?

What are you putting the 12x multiple on? past EBITDA or future EBITDA? if you're using past and future EBITDA is expected to increase materially for some reason then it'll understate the valuation.

$160 is roughly 3x $50. So you're saying that right now, the company trades at 4x (12 divided by 3x) EBITDA and it should trade at 12x? I don't think it's likely that something is trading that far away from where its comps do....

Sep 18, 2014

I made some tweaks to the calculation I was using a Wallstreet prep template for the analysis now the intrinsic value is $128.86. current price $51.01 the name of the Firm is Bristol Myers as for the assumptions Im using the analyst estimates from an Equity Research Report from JPM the Analyst even states the firm as overweight and that it trades at 31X of their eps estimates. How about if I fix my 3 statement model based on absolute projections from 3 year averages?

Sep 19, 2014

Depending on the company and industry etc, your WACC could also be quite low..,

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Sep 18, 2014

well the WACC the analyst uses in JPM Equity Research report is 9 % with a 0% long term growth rate. But I think that if I hand the case study to the alumni he will question me as of why I used 0% for the growth rate.

Sep 19, 2014

If you pull from another analyst you need to be able to justify the numbers.

Sep 18, 2014