💻🩺Business Overview

🎯Key Metrics

Total: -3/17

• +1 ✅ Projected Operating Margin: 12.62%
• +1 ✅ Projected 5-Year Revenue CAGR: 12.64%
• -2 ❌❌ Last 5-Year ROIC: -18.95%
• -2 ❌❌ Estimated Cost of Capital: 7.70% (greater than ROIC)
• -1 ❌ Last 5-Year Shares Outstanding CAGR: +8.43%
• +2 ✅✅ Projected 5-Year EPS CAGR: 27.08%
• +0 ⚠️ Projected 5-Year Dividend CAGR: N/A
• +2 ✅✅ Estimated Debt Rating: Aaa
• -2 ❌❌ Morningstar Moat: None
• -2 ❌❌ Morningstar Uncertainty: Very High

Hims & Hers Health is a high growth company, being currently on a rapid expansion of its business. This has some advantages like the projected stellar growth of both revenue and EPS but it will also normally represent the dillution of shares to support it and the negative ROIC (lower than the cost of capital) that it should be regularized during the next couple of years. All of this is also implied in the Morningstar poor ratings.

As always, don’t take this “metrics” too seriously. It shouldn’t tell you if its a good or bad company but it will tell you which allocation and how much risk you should take while investing in it. Like with everything, take this with a grain of salt.

Let’s see how the company is being priced currently in the market.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital.

Note that here we’re not using any historical methods. This is simple to explain, the company doesn’t have any “history”, at least relevant, that we can compare and expect mean reversion to.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s do not provide a rating for the company, I estimated it using its interest coverage ratio and comparing it to similar companies.

Cost of Capital: 7.70%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 70%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it.
• Terminal Cost of Capital – I’m assuming the cost of capital converges long term to the industry average.
• Initial and Terminal Tax Rate – Given the volatility of the current values I’m using here the industry average.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 25.85 dollars for Hims & Hers Health.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Hims & Hers Health seems to be undervalued given that its current price of 15.74 dollars is well below P10. From these simulations we can extrapolate that there’s more than 90% probability that the stock is undervalued at the current price.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 30%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 30 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Hims & Hers Health that is currently priced at 15.74 dollars seems to be undervalued being currently valued a well below P10. From this we can extrapolate that there’s around 90% probability that the stock is undervalued.

This seems to be in line with the previous DCF valuation method.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

EPS Scenario Returns

We can also go a little deeper and check for different EPS growth and P/E scenarios what the returns could be. I didn’t use the historical values give the volatility and growth stage of the company.

Feel free to change the values and see your own hypothesis play out: EPS Scenario Returns — The Fair Value Journal

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I would start buying below the 25.99 dollars given the volatility and uncertainty around this company and its industry.

Overall it seems Hims & Hers Health is undervalued at the current prices.

Fair Value: 29.21 dollars