In this surf city 5k 4th of julyarticle I am going to calculate the intrinsic value of Pacira Pharmaceuticals, Inc. (

NASDAQ:PCRX

) by projecting its future cash flows and then discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the

Simply Wall St analysis model

. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.

View our latest analysis for Pacira Pharmaceuticals

Is PCRX fairly valued?

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 five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$53.53

$78.53

$118.27

$159.43

$184.94

Source

Analyst x4

Analyst x4

Analyst x3

Analyst x3

Est @ 16%, capped from 19.39%

Present Value Discounted @ 8.59%

$49.29

$66.59

$92.36

$114.66

$122.49

Present Value of 5-year Cash Flow (PVCF)

= US$445m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV)

= FCF

2023

× (1 + g) ÷ (r – g) = US$185m × (1 + 2.9%) ÷ (8.6% – 2.9%) = US$3.4b

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

5

= US$3.4b ÷ ( 1 + 8.6%)

5

= US$2.2b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.7b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number.

This results in an intrinsic value of $65.21

. Compared to the current share price of $42.51, the stock is quite good value at a 35% discount to what it is available for right now.

NasdaqGS:PCRX Intrinsic Value Export January 2nd 19

Important assumptions

I’d like to 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Pacira Pharmaceuticals as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Story continues

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For PCRX, there are three relevant factors you should look at:

Financial Health

: Does PCRX have a healthy balance sheet? Take a look at our

free balance sheet analysis with six simple checks

on key factors like leverage and risk.

Future Earnings

: How does PCRX’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

: Are there other high quality stocks you could be holding instead of PCRX? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just

search here

.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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