Intrinsic value of K2M Group Holdings - KTWO

Previous Close

$27.50

  Intrinsic Value

$0.61

stock screener

  Rating & Target

str. sell

-98%

Previous close

$27.50

 
Intrinsic value

$0.61

 
Up/down potential

-98%

 
Rating

str. sell

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 0001), $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 1.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  12.00
  11.30
  10.67
  10.10
  9.59
  9.13
  8.72
  8.35
  8.01
  7.71
  7.44
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
  5.33
Revenue, $m
  289
  322
  356
  392
  430
  469
  510
  552
  596
  642
  690
  740
  792
  845
  901
  959
  1,019
  1,082
  1,148
  1,216
  1,287
  1,361
  1,439
  1,520
  1,604
  1,692
  1,785
  1,881
  1,982
  2,088
Variable operating expenses, $m
  271
  300
  330
  362
  395
  430
  466
  504
  543
  584
  613
  657
  702
  750
  800
  851
  905
  960
  1,019
  1,079
  1,142
  1,208
  1,277
  1,349
  1,424
  1,502
  1,584
  1,670
  1,759
  1,853
Fixed operating expenses, $m
  50
  51
  52
  53
  55
  56
  57
  58
  60
  61
  62
  64
  65
  66
  68
  69
  71
  72
  74
  76
  77
  79
  81
  83
  84
  86
  88
  90
  92
  94
Total operating expenses, $m
  321
  351
  382
  415
  450
  486
  523
  562
  603
  645
  675
  721
  767
  816
  868
  920
  976
  1,032
  1,093
  1,155
  1,219
  1,287
  1,358
  1,432
  1,508
  1,588
  1,672
  1,760
  1,851
  1,947
Operating income, $m
  -32
  -29
  -26
  -23
  -20
  -17
  -14
  -10
  -7
  -3
  15
  20
  24
  29
  33
  39
  44
  49
  55
  61
  67
  74
  81
  88
  96
  104
  113
  122
  131
  141
EBITDA, $m
  3
  8
  13
  18
  24
  30
  36
  43
  49
  57
  64
  72
  80
  88
  97
  106
  115
  125
  136
  147
  158
  170
  182
  195
  209
  223
  238
  254
  270
  287
Interest expense (income), $m
  0
  7
  9
  10
  12
  13
  15
  17
  19
  21
  23
  26
  28
  30
  33
  35
  38
  41
  44
  47
  50
  53
  57
  60
  64
  68
  72
  76
  80
  85
  90
Earnings before tax, $m
  -39
  -38
  -36
  -35
  -34
  -32
  -31
  -29
  -28
  -26
  -10
  -8
  -6
  -4
  -2
  1
  3
  6
  8
  11
  14
  18
  21
  25
  28
  32
  37
  41
  46
  51
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  2
  2
  3
  4
  5
  6
  7
  8
  9
  10
  11
  12
  14
Net income, $m
  -39
  -38
  -36
  -35
  -34
  -32
  -31
  -29
  -28
  -26
  -10
  -8
  -6
  -4
  -2
  0
  2
  4
  6
  8
  10
  13
  15
  18
  21
  24
  27
  30
  33
  37

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
Total assets, $m
  418
  465
  515
  567
  622
  678
  738
  799
  863
  930
  999
  1,071
  1,145
  1,223
  1,304
  1,388
  1,475
  1,566
  1,661
  1,760
  1,863
  1,970
  2,082
  2,199
  2,322
  2,449
  2,583
  2,722
  2,869
  3,021
Adjusted assets (=assets-cash), $m
  418
  465
  515
  567
  622
  678
  738
  799
  863
  930
  999
  1,071
  1,145
  1,223
  1,304
  1,388
  1,475
  1,566
  1,661
  1,760
  1,863
  1,970
  2,082
  2,199
  2,322
  2,449
  2,583
  2,722
  2,869
  3,021
Revenue / Adjusted assets
  0.691
  0.692
  0.691
  0.691
  0.691
  0.692
  0.691
  0.691
  0.691
  0.690
  0.691
  0.691
  0.692
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
  0.691
Average production assets, $m
  164
  183
  203
  223
  244
  267
  290
  314
  339
  366
  393
  421
  450
  481
  513
  546
  580
  616
  653
  692
  732
  775
  819
  865
  913
  963
  1,015
  1,070
  1,128
  1,188
Working capital, $m
  86
  96
  106
  117
  128
  140
  152
  165
  178
  191
  206
  220
  236
  252
  268
  286
  304
  323
  342
  362
  384
  406
  429
  453
  478
  504
  532
  561
  591
  622
Total debt, $m
  90
  106
  124
  142
  161
  181
  202
  223
  245
  269
  293
  318
  344
  371
  400
  429
  460
  492
  525
  559
  595
  633
  672
  713
  756
  801
  847
  896
  947
  1,001
Total liabilities, $m
  146
  163
  180
  199
  218
  237
  258
  280
  302
  325
  350
  375
  401
  428
  456
  486
  516
  548
  581
  616
  652
  690
  729
  770
  813
  857
  904
  953
  1,004
  1,057
Total equity, $m
  272
  303
  335
  369
  404
  441
  479
  519
  561
  604
  649
  696
  745
  795
  848
  902
  959
  1,018
  1,080
  1,144
  1,211
  1,281
  1,353
  1,430
  1,509
  1,592
  1,679
  1,770
  1,865
  1,964
Total liabilities and equity, $m
  418
  466
  515
  568
  622
  678
  737
  799
  863
  929
  999
  1,071
  1,146
  1,223
  1,304
  1,388
  1,475
  1,566
  1,661
  1,760
  1,863
  1,971
  2,082
  2,200
  2,322
  2,449
  2,583
  2,723
  2,869
  3,021
Debt-to-equity ratio
  0.330
  0.350
  0.370
  0.380
  0.400
  0.410
  0.420
  0.430
  0.440
  0.440
  0.450
  0.460
  0.460
  0.470
  0.470
  0.480
  0.480
  0.480
  0.490
  0.490
  0.490
  0.490
  0.500
  0.500
  0.500
  0.500
  0.500
  0.510
  0.510
  0.510
Adjusted equity ratio
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650
  0.650

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -39
  -38
  -36
  -35
  -34
  -32
  -31
  -29
  -28
  -26
  -10
  -8
  -6
  -4
  -2
  0
  2
  4
  6
  8
  10
  13
  15
  18
  21
  24
  27
  30
  33
  37
Depreciation, amort., depletion, $m
  34
  37
  39
  42
  44
  47
  50
  53
  56
  59
  48
  52
  56
  59
  63
  67
  72
  76
  81
  85
  90
  96
  101
  107
  113
  119
  125
  132
  139
  147
Funds from operations, $m
  -4
  -1
  3
  6
  10
  15
  19
  23
  28
  33
  38
  44
  49
  55
  61
  68
  74
  80
  87
  94
  101
  108
  116
  125
  133
  143
  152
  162
  173
  184
Change in working capital, $m
  9
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  15
  16
  17
  17
  18
  19
  20
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
Cash from operations, $m
  -14
  -11
  -8
  -4
  -1
  3
  7
  11
  15
  19
  24
  29
  34
  39
  45
  50
  56
  61
  67
  73
  80
  86
  93
  101
  108
  116
  125
  133
  143
  152
Maintenance CAPEX, $m
  -18
  -20
  -23
  -25
  -28
  -30
  -33
  -36
  -39
  -42
  -45
  -48
  -52
  -56
  -59
  -63
  -67
  -72
  -76
  -81
  -85
  -90
  -96
  -101
  -107
  -113
  -119
  -125
  -132
  -139
New CAPEX, $m
  -18
  -19
  -20
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -34
  -36
  -37
  -39
  -40
  -42
  -44
  -46
  -48
  -50
  -53
  -55
  -57
  -60
Cash from investing activities, $m
  -36
  -39
  -43
  -45
  -49
  -52
  -56
  -60
  -64
  -68
  -72
  -76
  -81
  -87
  -91
  -96
  -101
  -108
  -113
  -120
  -125
  -132
  -140
  -147
  -155
  -163
  -172
  -180
  -189
  -199
Free cash flow, $m
  -49
  -50
  -50
  -50
  -50
  -50
  -49
  -49
  -49
  -49
  -48
  -48
  -47
  -47
  -46
  -46
  -46
  -46
  -46
  -46
  -46
  -46
  -46
  -47
  -47
  -47
  -47
  -47
  -47
  -47
Issuance/(repayment) of debt, $m
  16
  17
  17
  18
  19
  20
  21
  22
  22
  23
  24
  25
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  39
  41
  43
  45
  47
  49
  51
  54
Issuance/(repurchase) of shares, $m
  68
  68
  69
  69
  69
  69
  69
  69
  69
  69
  55
  55
  55
  55
  54
  54
  55
  55
  55
  56
  56
  57
  58
  58
  59
  59
  60
  61
  62
  62
Cash from financing (excl. dividends), $m  
  84
  85
  86
  87
  88
  89
  90
  91
  91
  92
  79
  80
  81
  82
  82
  83
  86
  87
  88
  91
  92
  95
  97
  99
  102
  104
  107
  110
  113
  116
Total cash flow (excl. dividends), $m
  34
  35
  36
  37
  39
  40
  41
  42
  43
  44
  31
  32
  34
  35
  36
  38
  39
  41
  43
  44
  46
  48
  50
  53
  55
  57
  60
  63
  66
  69
Retained Cash Flow (-), $m
  -68
  -68
  -69
  -69
  -69
  -69
  -69
  -69
  -69
  -69
  -55
  -55
  -55
  -55
  -54
  -55
  -57
  -59
  -62
  -64
  -67
  -70
  -73
  -76
  -79
  -83
  -87
  -91
  -95
  -99
Prev. year cash balance distribution, $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 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
  -34
  -33
  -32
  -32
  -31
  -30
  -29
  -28
  -27
  -25
  -24
  -23
  -21
  -20
  -18
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -22
  -23
  -25
  -26
  -27
  -28
  -29
  -31
Discount rate, %
  6.60
  6.93
  7.28
  7.64
  8.02
  8.42
  8.84
  9.29
  9.75
  10.24
  10.75
  11.29
  11.85
  12.45
  13.07
  13.72
  14.41
  15.13
  15.88
  16.68
  17.51
  18.39
  19.31
  20.27
  21.29
  22.35
  23.47
  24.64
  25.87
  27.17
PV of cash for distribution, $m
  -32
  -29
  -26
  -23
  -21
  -18
  -16
  -14
  -11
  -10
  -8
  -6
  -5
  -4
  -3
  -2
  -2
  -1
  -1
  -1
  -1
  -1
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  94.4
  89.6
  85.5
  81.9
  78.7
  76.0
  73.5
  71.3
  69.3
  67.6
  66.3
  65.1
  64.0
  63.1
  62.2
  61.3
  60.6
  59.8
  59.1
  58.5
  57.9
  57.3
  56.8
  56.3
  55.8
  55.3
  54.9
  54.4
  54.0
  53.7

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 -27.7
Price to Sales 4.9
Price to Book 4.4
Price to Tangible Book
Price to Cash Flow -89.4
Price to Free Cash Flow -26.4
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 $258.031 million for the last fiscal year's total revenue generated by K2M Group Holdings. The default revenue input number comes from 0001 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 12% 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 6.6%, 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 94.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $49 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 9.5% 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 56.9%.

Life of production assets of 8.1 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 29.8%. 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 - $242.399 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 41.485 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 $1.1 billion.

RELATED COMPANIES Price Int.Val. Rating
NUVA NuVasive 57.79 31.23  str.sell
ZBH Zimmer Biomet 112.91 87.03  sell
OFIX Orthofix Inter 59.07 32.95  sell
SPNE SeaSpine Holdi 16.13 1.20  str.sell
SYK Stryker 167.82 100.38  sell
GMED Globus Medical 51.22 28.58  sell
JNJ Johnson&Johnso 144.68 176.79  buy
WMGI Wright Medical 28.64 0.98  str.sell

COMPANY NEWS

▶ K2M addresses lawsuits challenging $1.4B sale to Stryker   [Oct-25-18 02:50PM  American City Business Journals]
▶ [$$] Stryker Agrees to Buy Spinal-Device Maker K2M   [Aug-30-18 08:06PM  The Wall Street Journal]
▶ [$$] Stryker Agrees to Buy Spinal-Device Maker K2M   [07:09PM  The Wall Street Journal]
▶ Leesburg spinal surgery company K2M Group to sell for $1.4B   [04:49PM  American City Business Journals]
▶ K2M Group: 2Q Earnings Snapshot   [07:38PM  Associated Press]
▶ Cantor Fitzgerald Taps Spinal Stocks: 4 Top Picks   [Jun-03-18 06:06PM  Benzinga]
▶ K2M Group: 1Q Earnings Snapshot   [May-01-18 05:59PM  Associated Press]
▶ K2M Names Lane Major Chief Operating Officer   [Mar-29-18 04:45PM  GlobeNewswire]
▶ K2M Group reports 4Q loss   [Feb-28-18 07:09PM  Associated Press]
▶ K2M Group reports 3Q loss   [06:23PM  Associated Press]

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