How Should You Price Biogen Inc.’s (NASDAQ:BIIB) Stock?

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Knowing which valuation model to use for financial analysis can be incredibly confusing for even the most seasoned of investors. For example, we can either look at Biogen Inc.’s (NASDAQ:BIIB) cash flows or its peer group’s valuation to decide how much the company is actually worth. Which model do I listen to and more importantly why?

See our latest analysis for Biogen

Deep-dive into intrinsic valuation

Forecasting anything into the distant future is difficult and the same applies to forecasting free cash flows (FCFs) for businesses. This is why I’ve decided to use analyst FCF forecasts in my DCF to see what the consensus view is while also removing some subjectivity. If you’re unfamiliar with valuation, the assumption behind every DCF is that a firm’s true value is derived from the sum of all its future FCFs, which is why quality forecasts are important. After discounting the sum of BIIB’s future FCFs by 13%, it’s equity value comes to $US$59b, then 201.48k shares outstanding are divided through. This results in an intrinsic value of $292.41. Take a look at how I arrived at this intrinsic value here.,

But is this value reliable? To ensure our conclusion is robust, let’s take a look at how many analyst forecasts are being used in the last year of BIIB’s 5-year forecast horizon. With 5 analyst projections of BIIB’s FCF in year 5, our model is as a comprehensive reflection of the market’s view of BIIB. Therefore, this strengthens the conclusions our DCF makes on BIIB, which means some investors might want to attribute more significance to our model when determining a target price.

Deep-dive into relative valuation

While DCF models sum up future FCFs, relative valuation models are based on the idea that investors should pay the same price for two companies with identical risk and return profiles. Since the biggest dilemma is finding companies that are similar to BIIB, a viable proxy would be the overall Biotechs industry itself. Obtaining the fair value of BIIB through relative valuation is quite straightforward. We simply multiply BIIB’s earnings by the industry’s P/E ratio, which gives us a share price of $287.7 that implies BIIB is currently overvalued. However, is this conclusion robust enough for us to use?

One quick way of finding out is to see if BIIB shares a similar growth profile to the overall Biotechs industry we are comparing it to. At 22.18% earnings growth next year, BIIB has a dramatically different earnings growth profile to the overall Biotechs industry, which is expected to grow at 10.06%. Unfortunately, this check shows that the Biotechs industry is a poor proxy for BIIB, which weakens our relative valuation analysis. Rather, selectively choosing companies that had similar growth characteristics to BIIB would vastly improve our conclusion. I’d encourage you to do this by taking a look at BIIB’s competitors.

Which Model Should I Care About?

Neither model is perfect despite the robust financial theory behind them. Relative valuation is computationally simple but exposed to market irrationality, which undermines its usefulness. Conversely, intrinsic valuation is immune from these factors but heavily affected by human forecasting errors. Ultimately, investors should derive their final valuation based off both models. I encourage you to weight each model depending on your preferences to calculate a weighted average target price.

Next Steps:

For BIIB, there are three essential aspects you should further examine:

1. Financial Health: Does BIIB 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.

2. Future Earnings: How does BIIB’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of BIIB? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks 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 editorial-team@simplywallst.com.