Intrinsic value of K2M Group Holdings - KTWO

Previous Close

$19.42

  Intrinsic Value

$0.81

stock screener

  Rating & Target

str. sell

-96%

  Value-price divergence*

-94%

Previous close

$19.42

 
Intrinsic value

$0.81

 
Up/down potential

-96%

 
Rating

str. sell

 
Value-price divergence*

-94%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of KTWO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.72
  11.90
  11.21
  10.59
  10.03
  9.53
  9.07
  8.67
  8.30
  7.97
  7.67
  7.41
  7.17
  6.95
  6.75
  6.58
  6.42
  6.28
  6.15
  6.04
  5.93
  5.84
  5.75
  5.68
  5.61
  5.55
  5.50
  5.45
  5.40
  5.36
  5.32
Revenue, $m
  237
  265
  295
  326
  359
  393
  429
  466
  505
  545
  587
  630
  675
  722
  771
  822
  874
  929
  986
  1,046
  1,108
  1,173
  1,240
  1,311
  1,384
  1,461
  1,541
  1,625
  1,713
  1,805
  1,901
Variable operating expenses, $m
 
  238
  263
  290
  318
  347
  377
  409
  442
  476
  512
  536
  575
  615
  656
  700
  744
  791
  840
  891
  943
  999
  1,056
  1,116
  1,179
  1,244
  1,312
  1,384
  1,459
  1,537
  1,619
Fixed operating expenses, $m
 
  59
  61
  62
  64
  66
  67
  69
  71
  72
  74
  76
  78
  80
  82
  84
  86
  88
  90
  93
  95
  97
  100
  102
  105
  108
  110
  113
  116
  119
  122
Total operating expenses, $m
  271
  297
  324
  352
  382
  413
  444
  478
  513
  548
  586
  612
  653
  695
  738
  784
  830
  879
  930
  984
  1,038
  1,096
  1,156
  1,218
  1,284
  1,352
  1,422
  1,497
  1,575
  1,656
  1,741
Operating income, $m
  -35
  -32
  -29
  -26
  -23
  -19
  -16
  -12
  -8
  -4
  1
  17
  22
  27
  33
  38
  44
  50
  56
  63
  69
  77
  84
  92
  101
  109
  119
  128
  139
  149
  161
EBITDA, $m
  -6
  -6
  -1
  4
  9
  14
  19
  25
  31
  38
  44
  51
  59
  66
  74
  82
  91
  100
  109
  119
  129
  140
  151
  163
  175
  188
  202
  216
  231
  246
  263
Interest expense (income), $m
  0
  3
  3
  4
  4
  5
  5
  6
  7
  7
  8
  9
  10
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  26
  27
  29
  31
Earnings before tax, $m
  -42
  -35
  -32
  -30
  -27
  -24
  -21
  -18
  -15
  -11
  -7
  9
  13
  17
  21
  26
  31
  36
  41
  47
  52
  59
  65
  72
  79
  86
  94
  102
  111
  120
  130
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  2
  3
  5
  6
  7
  8
  10
  11
  13
  14
  16
  18
  19
  21
  23
  25
  28
  30
  32
  35
Net income, $m
  -42
  -35
  -32
  -30
  -27
  -24
  -21
  -18
  -15
  -11
  -7
  6
  9
  12
  16
  19
  22
  26
  30
  34
  38
  43
  47
  52
  58
  63
  69
  75
  81
  88
  95

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  46
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  384
  378
  421
  465
  512
  561
  612
  665
  720
  777
  837
  899
  963
  1,030
  1,100
  1,172
  1,247
  1,326
  1,407
  1,492
  1,581
  1,673
  1,769
  1,870
  1,974
  2,084
  2,199
  2,318
  2,443
  2,574
  2,712
Adjusted assets (=assets-cash), $m
  338
  378
  421
  465
  512
  561
  612
  665
  720
  777
  837
  899
  963
  1,030
  1,100
  1,172
  1,247
  1,326
  1,407
  1,492
  1,581
  1,673
  1,769
  1,870
  1,974
  2,084
  2,199
  2,318
  2,443
  2,574
  2,712
Revenue / Adjusted assets
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
  0.701
Average production assets, $m
  97
  108
  121
  133
  147
  161
  175
  191
  206
  223
  240
  258
  276
  295
  315
  336
  358
  380
  403
  428
  453
  480
  507
  536
  566
  598
  630
  665
  701
  738
  777
Working capital, $m
  116
  80
  88
  98
  108
  118
  129
  140
  151
  163
  176
  189
  203
  217
  231
  246
  262
  279
  296
  314
  332
  352
  372
  393
  415
  438
  462
  488
  514
  541
  570
Total debt, $m
  73
  86
  102
  118
  134
  152
  170
  189
  209
  229
  251
  273
  296
  320
  345
  371
  398
  426
  455
  485
  517
  550
  584
  620
  658
  697
  738
  781
  826
  873
  922
Total liabilities, $m
  122
  135
  151
  167
  183
  201
  219
  238
  258
  278
  300
  322
  345
  369
  394
  420
  447
  475
  504
  534
  566
  599
  633
  669
  707
  746
  787
  830
  875
  922
  971
Total equity, $m
  262
  243
  270
  299
  329
  360
  393
  427
  462
  499
  537
  577
  618
  661
  706
  752
  801
  851
  903
  958
  1,015
  1,074
  1,136
  1,200
  1,268
  1,338
  1,411
  1,488
  1,569
  1,653
  1,741
Total liabilities and equity, $m
  384
  378
  421
  466
  512
  561
  612
  665
  720
  777
  837
  899
  963
  1,030
  1,100
  1,172
  1,248
  1,326
  1,407
  1,492
  1,581
  1,673
  1,769
  1,869
  1,975
  2,084
  2,198
  2,318
  2,444
  2,575
  2,712
Debt-to-equity ratio
  0.279
  0.360
  0.380
  0.390
  0.410
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.470
  0.480
  0.480
  0.490
  0.490
  0.500
  0.500
  0.500
  0.510
  0.510
  0.510
  0.510
  0.520
  0.520
  0.520
  0.520
  0.520
  0.530
  0.530
  0.530
Adjusted equity ratio
  0.639
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642
  0.642

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -42
  -35
  -32
  -30
  -27
  -24
  -21
  -18
  -15
  -11
  -7
  6
  9
  12
  16
  19
  22
  26
  30
  34
  38
  43
  47
  52
  58
  63
  69
  75
  81
  88
  95
Depreciation, amort., depletion, $m
  29
  26
  28
  30
  32
  33
  35
  37
  39
  42
  44
  34
  36
  39
  41
  44
  47
  50
  53
  56
  60
  63
  67
  71
  74
  79
  83
  87
  92
  97
  102
Funds from operations, $m
  -28
  -8
  -4
  0
  4
  9
  14
  19
  25
  30
  36
  40
  46
  51
  57
  63
  69
  76
  83
  90
  98
  106
  114
  123
  132
  142
  152
  162
  173
  185
  197
Change in working capital, $m
  -15
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  15
  16
  16
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
Cash from operations, $m
  -13
  -17
  -13
  -9
  -5
  -1
  3
  8
  13
  18
  24
  27
  32
  37
  42
  48
  54
  60
  66
  72
  79
  86
  94
  102
  110
  119
  128
  137
  147
  157
  168
Maintenance CAPEX, $m
  0
  -13
  -14
  -16
  -18
  -19
  -21
  -23
  -25
  -27
  -29
  -32
  -34
  -36
  -39
  -41
  -44
  -47
  -50
  -53
  -56
  -60
  -63
  -67
  -71
  -74
  -79
  -83
  -87
  -92
  -97
New CAPEX, $m
  -31
  -11
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -38
  -39
Cash from investing activities, $m
  -24
  -24
  -26
  -29
  -31
  -33
  -36
  -38
  -41
  -43
  -46
  -50
  -52
  -55
  -59
  -62
  -66
  -69
  -73
  -77
  -81
  -86
  -91
  -96
  -101
  -105
  -112
  -117
  -123
  -130
  -136
Free cash flow, $m
  -37
  -41
  -40
  -38
  -36
  -34
  -32
  -30
  -28
  -25
  -23
  -22
  -20
  -18
  -16
  -14
  -12
  -10
  -7
  -5
  -2
  0
  3
  6
  9
  13
  16
  20
  24
  28
  32
Issuance/(repayment) of debt, $m
  47
  14
  15
  16
  17
  17
  18
  19
  20
  21
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  32
  33
  34
  36
  38
  39
  41
  43
  45
  47
  49
Issuance/(repurchase) of shares, $m
  0
  61
  60
  58
  57
  55
  54
  52
  50
  48
  46
  33
  32
  31
  29
  28
  26
  24
  22
  20
  19
  16
  14
  12
  10
  7
  5
  2
  0
  0
  0
Cash from financing (excl. dividends), $m  
  49
  75
  75
  74
  74
  72
  72
  71
  70
  69
  67
  55
  55
  55
  54
  54
  53
  52
  51
  50
  51
  49
  48
  48
  48
  46
  46
  45
  45
  47
  49
Total cash flow (excl. dividends), $m
  11
  34
  35
  36
  37
  39
  40
  41
  42
  43
  44
  34
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  75
  81
Retained Cash Flow (-), $m
  25
  -61
  -60
  -58
  -57
  -55
  -54
  -52
  -50
  -48
  -46
  -40
  -41
  -43
  -45
  -46
  -48
  -50
  -52
  -55
  -57
  -59
  -62
  -65
  -67
  -70
  -74
  -77
  -80
  -84
  -88
Prev. year cash balance distribution, $m
 
  45
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  18
  -24
  -22
  -20
  -17
  -14
  -11
  -8
  -5
  -1
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -12
  -10
  -7
Discount rate, %
 
  5.90
  6.20
  6.50
  6.83
  7.17
  7.53
  7.91
  8.30
  8.72
  9.15
  9.61
  10.09
  10.60
  11.13
  11.68
  12.27
  12.88
  13.52
  14.20
  14.91
  15.65
  16.44
  17.26
  18.12
  19.03
  19.98
  20.98
  22.03
  23.13
  24.29
PV of cash for distribution, $m
 
  17
  -22
  -18
  -15
  -12
  -9
  -7
  -4
  -2
  -1
  -2
  -2
  -2
  -2
  -1
  -1
  -1
  -1
  -1
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  92.0
  85.4
  80.1
  75.6
  71.8
  68.6
  65.9
  63.5
  61.6
  59.9
  58.7
  57.7
  56.8
  56.1
  55.4
  54.8
  54.3
  53.9
  53.5
  53.2
  52.9
  52.7
  52.5
  52.4
  52.3
  52.2
  52.2
  52.2
  52.2
  52.2

K2M Group Holdings, Inc. is a medical device company focused on designing, developing and commercializing spine and minimally invasive technologies and techniques. The Company's solutions are focused on achieving three-dimensional Total Body Balance. Its spine products are used by spine surgeons to treat spinal pathologies, such as deformity (primarily scoliosis), trauma and tumor. Its products consist of implants, disposables and instruments, which are marketed and sold primarily to hospitals for use by spine surgeons. As of December 31, 2016, its product portfolio consisted of 83 product lines that are used in complex spine, minimally invasive surgery (MIS) and degenerative surgeries. Its technologies include EVEREST, MESA, Rail 4D, Quicket Deformity, CASCADIA, CAPRI, SERENGETI, RAVINE and tifix. Its degenerative spine technologies are used to treat degenerative spine disorders and include products, such as cervical, thoracic and lumbar spinal fusion devices and interbody devices.

FINANCIAL RATIOS  of  K2M Group Holdings (KTWO)

Valuation Ratios
P/E Ratio -19.5
Price to Sales 3.5
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow -63.1
Price to Free Cash Flow -18.7
Growth Rates
Sales Growth Rate 9.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 121.4%
Cap. Spend. - 3 Yr. Gr. Rate 25.4%
Financial Strength
Quick Ratio 46
Current Ratio 0.1
LT Debt to Equity 27.5%
Total Debt to Equity 27.9%
Interest Coverage 0
Management Effectiveness
Return On Assets -11.1%
Ret/ On Assets - 3 Yr. Avg. -13.5%
Return On Total Capital -12.8%
Ret/ On T. Cap. - 3 Yr. Avg. -16.7%
Return On Equity -15.3%
Return On Equity - 3 Yr. Avg. -18.5%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 65%
Gross Margin - 3 Yr. Avg. 66%
EBITDA Margin -5.5%
EBITDA Margin - 3 Yr. Avg. -7.6%
Operating Margin -14.3%
Oper. Margin - 3 Yr. Avg. -18.9%
Pre-Tax Margin -17.7%
Pre-Tax Margin - 3 Yr. Avg. -22.6%
Net Profit Margin -17.7%
Net Profit Margin - 3 Yr. Avg. -22.6%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 0%

KTWO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KTWO stock intrinsic value calculation we used $237 million for the last fiscal year's total revenue generated by K2M Group Holdings. The default revenue input number comes from 2016 income statement of K2M Group Holdings. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our KTWO stock valuation model: a) initial revenue growth rate of 11.9% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.9%, whose default value for KTWO is calculated based on our internal credit rating of K2M Group Holdings, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of K2M Group Holdings.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of KTWO stock the variable cost ratio is equal to 90.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $58 million in the base year in the intrinsic value calculation for KTWO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for K2M Group Holdings.

Corporate tax rate of 27% is the nominal tax rate for K2M Group Holdings. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the KTWO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for KTWO are equal to 40.9%.

Life of production assets of 7.6 years is the average useful life of capital assets used in K2M Group Holdings operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for KTWO is equal to 30%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $262 million for K2M Group Holdings - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 43.28 million for K2M Group Holdings is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of K2M Group Holdings at the current share price and the inputted number of shares is $0.8 billion.

RELATED COMPANIES Price Int.Val. Rating
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SYK Stryker 147.29 99.03  sell
GMED Globus Medical 29.00 18.42  sell
JNJ Johnson&Johnso 136.12 96.55  sell
EXAC Exactech 32.30 5.75  str.sell
WMGI Wright Medical 26.58 0.43  str.sell

COMPANY NEWS

▶ Company News For Oct 10, 2017   [08:30AM  Zacks]
▶ Why Viacom, DaVita, and K2M Group Holdings Slumped Today   [Oct-09-17 04:30PM  Motley Fool]
▶ Why K2M Group Holdings Inc. Sank Today   [02:11PM  Motley Fool]
▶ K2M Group reports 2Q loss   [Aug-01-17 11:28PM  Associated Press]
▶ K2M Group reports 1Q loss   [May-02-17 06:10PM  Associated Press]
▶ Which Medtech Stocks Should You Buy Ahead Of Q1?   [03:16PM  Investor's Business Daily]
▶ Spinal Products Maker K2M Plunges After Issuing Weak Guidance   [04:15PM  Investor's Business Daily]
▶ K2M Group reports 4Q loss   [04:38PM  Associated Press]
▶ Is K2M Group Holdings Inc (KTWO) A Good Stock To Buy?   [Dec-13-16 04:57AM  at Insider Monkey]
Financial statements of KTWO
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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