Complete Valuation Case Study
Put everything together: a comprehensive valuation of a real-world-style company using DCF, multiples, and scenario analysis to reach an investment decision.
Learning Objectives
- Synthesize all valuation techniques learned in this course
- Navigate trade-offs between different valuation approaches
- Build a complete investment thesis with risk assessment
- Make a final investment decision with appropriate conviction
Complete Valuation Case Study#
You've learned the theory. Now let's apply everything to value a company from scratch and reach an investment decision. We'll use MedDevice Corp, a fictional mid-cap medical device manufacturer.
The Mission: Determine whether MedDevice Corp, trading at $62 per share, represents a good investment. We'll use DCF, comparables, and scenario analysis to build conviction.
Part 1: Understanding the Business#
Company Profile#
| Item | Details |
|---|---|
| Business | Orthopedic medical devices (joint replacements, surgical instruments) |
| Revenue Mix | Implants 70%, Instruments 20%, Services 10% |
| Geography | US 60%, Europe 25%, Asia 15% |
| Customers | Hospitals and ambulatory surgery centers |
| Competitive Position | #3 player (15% share) behind Stryker and J&J |
| Moat Sources | Surgeon relationships, FDA approvals, training programs |
Historical Financials#
| Metric | 2022 | 2023 | 2024 |
|---|---|---|---|
| Revenue | $1,800M | $1,980M | $2,178M |
| Growth | 8% | 10% | 10% |
| Gross Margin | 62% | 63% | 64% |
| Operating Margin | 18% | 19% | 20% |
| Net Income | $259M | $302M | $349M |
| EPS | $4.32 | $5.03 | $5.82 |
| Free Cash Flow | $220M | $260M | $300M |
Current Valuation Data#
| Item | Value |
|---|---|
| Stock Price | $62.00 |
| Shares Outstanding | 60M |
| Market Cap | $3,720M |
| Net Debt | $400M |
| Enterprise Value | $4,120M |
Part 2: DCF Valuation#
Revenue Forecast#
Historical analysis:
- 3-year CAGR: 10%
- Industry growing ~6% (aging population driving demand)
- MedDevice gaining share through new products
Revenue projections:
| Year | Revenue | Growth | Rationale |
|---|---|---|---|
| 2024A | $2,178M | 10% | Actual |
| 2025E | $2,374M | 9% | New product launch |
| 2026E | $2,563M | 8% | Continued share gains |
| 2027E | $2,742M | 7% | Growth normalizing |
| 2028E | $2,906M | 6% | Approaching industry rate |
| 2029E | $3,051M | 5% | Terminal approach |
Margin Forecast#
| Year | Gross Margin | Operating Margin | Rationale |
|---|---|---|---|
| 2024A | 64% | 20% | Actual |
| 2025E | 65% | 21% | Scale benefits |
| 2026E | 65% | 22% | Efficiency gains |
| 2027E | 66% | 22% | Stable at scale |
| 2028E | 66% | 23% | Modest expansion |
| 2029E | 66% | 23% | Terminal level |
Free Cash Flow Build#
| Item | 2025E | 2026E | 2027E | 2028E | 2029E |
|---|---|---|---|---|---|
| Revenue | $2,374M | $2,563M | $2,742M | $2,906M | $3,051M |
| Operating Income | $499M | $564M | $603M | $668M | $702M |
| Taxes (22%) | ($110M) | ($124M) | ($133M) | ($147M) | ($154M) |
| NOPAT | $389M | $440M | $470M | $521M | $548M |
| D&A | $95M | $103M | $110M | $116M | $122M |
| CapEx (5%) | ($119M) | ($128M) | ($137M) | ($145M) | ($153M) |
| Δ Working Capital | ($20M) | ($19M) | ($18M) | ($16M) | ($15M) |
| Free Cash Flow | $345M | $396M | $425M | $476M | $502M |
WACC Calculation#
| Component | Value | Reasoning |
|---|---|---|
| Risk-free rate | 4.5% | 10-year Treasury |
| Beta | 0.9 | Lower than market (defensive healthcare) |
| Equity risk premium | 5.5% | Historical average |
| Cost of Equity | 9.45% | 4.5% + 0.9 × 5.5% |
| Cost of Debt (after-tax) | 4.0% | 5.3% pre-tax × (1-25%) |
| Debt weight | 10% | $400M / $4,120M EV |
| WACC | 8.9% | Round to 9% |
Terminal Value#
Using perpetuity growth:
Terminal Value = FCF₂₀₂₉ × (1 + g) / (WACC - g)
= $502M × 1.03 / (0.09 - 0.03)
= $517M / 0.06
= $8,617M
Present Value Calculation#
| Year | Cash Flow | Discount Factor | Present Value |
|---|---|---|---|
| 2025 | $345M | 0.917 | $316M |
| 2026 | $396M | 0.842 | $333M |
| 2027 | $425M | 0.772 | $328M |
| 2028 | $476M | 0.708 | $337M |
| 2029 | $502M | 0.650 | $326M |
| Terminal | $8,617M | 0.650 | $5,601M |
| Enterprise Value | $7,241M |
Equity Value and Share Price#
Equity Value = Enterprise Value - Net Debt
= $7,241M - $400M = $6,841M
Intrinsic Value per Share = $6,841M / 60M = $114
DCF Result: $114 per share (84% upside to current $62)
Part 3: Comparable Company Analysis#
Peer Group#
| Company | EV/Revenue | EV/EBITDA | P/E | Growth | Op Margin |
|---|---|---|---|---|---|
| Stryker | 5.8x | 19x | 27x | 8% | 22% |
| Zimmer | 3.8x | 12x | 15x | 5% | 20% |
| Smith+Nephew | 3.2x | 11x | 16x | 4% | 18% |
| Peer Average | 4.3x | 14x | 19x | 6% | 20% |
| MedDevice | 1.9x | 9x | 11x | 10% | 20% |
Multiples-Based Valuation#
| Method | Calculation | Implied Share Price |
|---|---|---|
| EV/Revenue (4.3x) | $2,178M × 4.3 = $9,365M EV | $149 |
| EV/EBITDA (14x) | $524M × 14 = $7,336M EV | $116 |
| P/E (19x) | $5.82 × 19 = $111 | $111 |
| Average | $125 |
Comps Result: $111-$149 per share, average $125 (102% upside)
Why the Discount?#
MedDevice trades at significant discount to peers. Possible reasons:
- Smaller scale (#3 vs. #1-2)
- Less diversified product line
- Lower investor awareness
- Recent management turnover
If discount is justified: Apply 25% discount to peer averages → $94 If discount is unwarranted: Full peer valuation → $125
Part 4: Scenario Analysis#
Scenario Definitions#
Bull Case (20%):
- New products exceed expectations
- Market share gains accelerate (12% growth)
- Margins expand to 25%
- Acquisition interest from larger players
Base Case (55%):
- Execution on plan
- 8% average growth
- Margins stable at 22%
- Independent operation continues
Bear Case (25%):
- Competitive pressure from Stryker
- Growth slows to 4%
- Margin compression to 18%
- Loss of key surgeon relationships
Scenario Valuations#
| Scenario | DCF Value | Probability | Weighted |
|---|---|---|---|
| Bull | $145 | 20% | $29 |
| Base | $114 | 55% | $63 |
| Bear | $55 | 25% | $14 |
| Expected Value | $106 |
Risk Assessment#
| Risk | Likelihood | Impact | Mitigation |
|---|---|---|---|
| Reimbursement cuts | Medium | High | Diversified payer mix |
| New competition | Medium | Medium | Strong surgeon relationships |
| Recall/quality issue | Low | Very High | Robust QA program |
| Management departure | Medium | Medium | Deep bench |
Part 5: Investment Decision#
Valuation Summary#
| Method | Value | vs. Current ($62) |
|---|---|---|
| DCF | $114 | +84% |
| Comps (avg) | $125 | +102% |
| Comps (discounted) | $94 | +52% |
| Scenario Expected | $106 | +71% |
Margin of Safety Analysis#
| Reference Point | Margin of Safety |
|---|---|
| vs. DCF ($114) | 46% |
| vs. Expected Value ($106) | 42% |
| vs. Bear Case ($55) | -13% (price above bear) |
Current price is 42-46% below most value estimates, but above bear case—if bear scenario materializes, we lose money.
The Final Decision#
Recommendation: BUY with the following framework:
| Element | Decision |
|---|---|
| Conviction | High—multiple methods point to undervaluation |
| Position Size | Moderate—bear case risk limits sizing |
| Entry Strategy | Start 1/3 position now, add on pullbacks |
| Target Price | $95-100 (conservative, 15% below expected value) |
| Stop Loss | Reassess below $50 (approaching bear value) |
| Time Horizon | 18-24 months for value recognition |
What Would Change Our View?#
| Development | Action |
|---|---|
| Margin deterioration >2% | Reduce position |
| Growth slows below 5% | Reassess bear probability |
| Acquisition offer | Sell on premium |
| Major new product success | Increase position |
| Management quality concerns | Exit position |
Key Learnings from This Case#
1. Convergence Builds Conviction#
Multiple methods (DCF, comps, scenarios) all pointing to undervaluation increases confidence. When methods diverge significantly, dig into why.
2. Understand the Narrative#
Numbers don't exist in a vacuum. MedDevice's discount likely reflects real concerns (scale, competition). Determine if concerns are already priced or if they'll worsen.
3. Position for What Can Go Wrong#
Despite 40%+ upside estimates, we sized moderately because bear case shows potential loss. Risk management matters more than hitting home runs.
4. Have a Plan, Not Just a Thesis#
Entry strategy, target price, stop loss, time horizon—without these, you're gambling, not investing.
Key Takeaways
Valuation Results:
- DCF intrinsic value: $114 (84% upside)
- Comparable company average: $125 (102% upside)
- Scenario expected value: $106 (71% upside)
- Bear case value: $55 (potential -13% loss)
Investment Decision:
- Buy at moderate position size
- Multiple methods confirm undervaluation
- Bear case risk limits aggressive sizing
- 18-24 month horizon for value recognition
Process Recap:
- Understand the business and competitive position
- Build DCF with explicit revenue, margin, and FCF projections
- Cross-check with comparable company multiples
- Stress-test with bull/base/bear scenarios
- Calculate margin of safety relative to each reference point
- Size position based on conviction and risk
- Define entry strategy, target, and exit triggers