A Look At The Intrinsic Value Of Farmacosmo S.p.A. (BIT:COSMO)
Key Insights
- Farmacosmo's estimated fair value is €0.42 based on 2 Stage Free Cash Flow to Equity
- Current share price of €0.49 suggests Farmacosmo is potentially trading close to its fair value
- When compared to theindustry average discount of -272%, Farmacosmo's competitors seem to be trading at a greater premium to fair value
Today we will run through one way of estimating the intrinsic value of Farmacosmo S.p.A. (BIT:COSMO) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF (€, Millions) | €2.05m | €1.90m | €1.82m | €1.79m | €1.78m | €1.79m | €1.82m | €1.85m | €1.89m | €1.94m |
| Growth Rate Estimate Source | Analyst x1 | Analyst x2 | Est @ -3.99% | Est @ -1.90% | Est @ -0.43% | Est @ 0.60% | Est @ 1.32% | Est @ 1.82% | Est @ 2.18% | Est @ 2.42% |
| Present Value (€, Millions) Discounted @ 13% | €1.8 | €1.5 | €1.3 | €1.1 | €1.0 | €0.9 | €0.8 | €0.7 | €0.6 | €0.6 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €10m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 3.0%. We discount the terminal cash flows to today's value at a cost of equity of 13%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = €1.9m× (1 + 3.0%) ÷ (13%– 3.0%) = €20m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €20m÷ ( 1 + 13%)10= €6.0m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €16m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €0.5, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
We would point out that 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 Farmacosmo 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 13%, which is based on a levered beta of 1.329. 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.
Check out our latest analysis for Farmacosmo
SWOT Analysis for Farmacosmo
- Debt is well covered by earnings.
- Expensive based on P/S ratio and estimated fair value.
- Forecast to reduce losses next year.
- Debt is not well covered by operating cash flow.
- Has less than 3 years of cash runway based on current free cash flow.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Farmacosmo, there are three further elements you should look at:
- Risks: For example, we've discovered 4 warning signs for Farmacosmo that you should be aware of before investing here.
- Future Earnings: How does COSMO'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.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every Italian stock every day, so if you want to find the intrinsic value of any other stock just search here.
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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.