Company Project- Axon

CompanyProject- Axon

Tableof Contents

and Investment Recommendation 3

i. Earnings at a Glance 3

ii. Current Sell-off: A Big Boom for Axon 3

Business Summary 3

Risks 4

Valuation 4

i. An&nbspExplanation/Justification for your Assumptions 4

ii. Two DDMs, a Simple One and a More Complex One 5

a. Simple DDM 5

b. Complex DDM 6

iii. A FCFF valuation and a FCFE valuation 6

Free Cash Flow to the Firm 6

Free Cash Flow to Equity 7

iv. A Residual Income valuation 7

v. A Valuation Based on Market Multiples 8

vi. Judgment of Value 8

Appendixes 9

Appendix 1: Axon’s Stock Summary 9

Appendix 2: Axon Rating Summary 9

Appendix 3: Axon Stock Chart 9

Appendix 4: Cash flow Statement of Axon 10

References 11

and Investment Recommendation

  1. Earnings at a Glance

Accordingto the New York Stock Exchange, Axovant Science Ltd. With tickersymbol, AXON announced its yearly earnings of $ -0.3. However, ZackConsensus estimated earnings of $ -0.24. Many analysts also projectedthe future share price earnings of the company. This report is givento aid in an investment recommendation for AXON. The current shareprice of Axovant Science Ltd. is $ 24.67, and the probability thatthe share price will rise to $ 35 is 100 percent. Based on thisanalysis, most analysts would advise an investor or a shareholderwilling to invest in Axovant Sciences Ltd alias AXON to strongly buyshares in the company rather than to hold or sell their shares asseen in appendix 1 and 2.

  1. Current Sell-off: A Big Boom for Axon

PiperJaffrey targeted a share price of $ 23 on Axovant Sciences Ltd. Withshares under pressure in the Pfizer Axon announced itsdiscontinuation in the antagonist program (SAM-760). The analysts whorated Axon gave it an overweight rating implying that it is one ofthe best companies to invest in currently. In response to this, theyadvised investors and shareholders to buy the stocks of AxovantSciences Ltd. today to avoid future expectations of rising in shareprice. Ideally, an investor ought to buy shares when the stock pricesare low and sell them when the share prices are high in order tobenefit from the investment as seen in Appendix 1 and 2.

BusinessSummary

AxovanSciences Ltd is a clinical biopharmaceuticals organization thataddresses the behavioral, cognitive units of Dementia. The company’svision is to be the leading enterprise on the treatment of Dementiaby addressing different needs of patients based on their cognitive,behavioral, and functional components. Their mission is to build acompany that sells CNS drugs at a low cost and to deliver qualitymedicine and value to the patients and the stakeholders of thecompany. This year, the firm did not make any sales but incurredoperating expenses, which led to an operating loss amounting to $(30,589). It’s quick ratio was 17.60 percent while its financialleverage was 1.06. This shows that Axovant Sciences Ltd does not haveenough liquid assets, which can easily be converted into cash.

Risks

Arisk is a probability that the actual return will be lower than theexpected return of an investment project. Risks can be divided intotwo basic types: systematic and unsystematic risks. A systematic riskalso known as market risk is the volatility inherent in the entiremarket. This type of risk cannot be diversified into differentportfolios. Unsystematic risk, on the other hand, also known asspecific or residual risk is the uncertainty that comes withinvesting in a particular company or industry. This type of risk canbe reduced through diversification of an investor’s funds intodifferent companies or investment portfolios.

Valuation

  1. An&nbspExplanation/Justification for your Assumptions

AxovantSciences Ltd (AXON) has a discount rate of 12 percent while itsgrowth rate is 5 percent. The growth rate has been calculated for anaverage of ten years. According to the company’s annual report,Axovant Sciences Ltd had free cash flows of $ (691,620) in 2015 asseen in appendix 4. The reason I used a discount rate of 12 percentis that companies in the same industry as Axoviant Sciences Ltd(AXON) have a discount rate of 12 percent. This is an implieddiscount rate. We cannot, however, determine the actual or exactdiscount rate of Axon as the company has not paid any dividends sinceit was incorporated. It does not also have a beta, a risk-free rate,and a market premium in order to use the Capital Asset Pricing Model(CAPM) to calculate the cost of equity, which will be used as ourdiscount rate. Lastly, the reason I used a growth rate of 5 percentis that growing companies within the same industry have that samediscount rate.

  1. Two DDMs, a Simple One and a More Complex One

Thedividend discount model (DDM) is the simplest approach for valuingstock. DDM is a procedure for valuing the price of a stock by usinghistorical dividends and discounting them back to their presentvalues. There is a simple formula for calculating DDM and a complexone (Pinto,Henry, Robinson, &amp Stowe, 2015).

  1. Simple DDM

Here,we assume that the company pays dividends annually with a zero growthrate and a 12 percent discount rate as shown below (Pinto,Henry, Robinson, &amp Stowe, 2015).

AxovantSciences Ltd has a dividend yield of 2.4 percent, which can be gottenfrom S&ampP 500, and a share price of $ 11.56, which can be gottenfrom Morningstar, NYSE, or yahoo finance. To calculate the dividendper share Axon will pay this year, we use the formula below.

Wecan now calculate the value per share of the company.

  1. Complex DDM

Here,we use the formula below (Pinto,Henry, Robinson, &amp Stowe, 2015).

Axonis expected to pay a dividend per share of $ 0.28 this year. Itsdiscount rate is 12 percent while the growth rate is 5 percent. Belowis the value per share of the firm.

  1. A FCFF valuation and a FCFE valuation

FreeCash Flow to the Firm (FCFF) is the cash flow available to thesupplier of a company after paying all operating expenses includingcompany taxes and after all investments have been made. Ideally, itis the cash flow from operations less all capital expenditures. FreeCash flows to equity, on the other hand, is the cash flow availableto the equity shareholders of a company after reducing all operatingexpenses, all payments, interests, and taxes and after all investmentprojects have been made. Ideally, it is calculated by taking the cashflows from operations of the company less all payments less capitalexpenditures and then adding all the receipts from the debt holders(Pinto,Henry, Robinson, &amp Stowe, 2015).

FreeCash Flow to the Firm

Axonhas cash flows from operating activities amounting to $ 682,498 andcapital expenditures amounting to $ -9,122 as seen in Appendix 4.Below is the FCFF of the firm.

Cash flow from operating activities

$ 682,498

Capital expenditures

$ -9,122

FCFF

$ 691,620

FreeCash Flow to Equity

Axonhas cash flows from operating activities amounting to $ 682,498,capital expenditures amounting to $ -9,122 as seen in Appendix 4. Italso made payments amounting to $ 133,000 with zero interest and zerotaxes. Below is the FCFE of the firm.

Cash flow from operating activities

$ 682,498

Capital expenditures

$ -9,122

Payments

133,000

Interests

0

Taxes

0

Receipts

0

Increase in WC

$ 2,070

FCFE

$ 693,690

  1. A Residual Income Valuation

Residualincome is the amount of income a company gets after paying all itsdebt. It is calculated by taking the net income less the equitycharge. The equity charge, on the other hand, is calculated by takingthe amount of equity multiply by the cost of equity as shown below(Pinto,Henry, Robinson, &amp Stowe, 2015).

Net income

($ 133,000,000)

Equity charge

($ 40,426,800)

Residual income

($ 173,426,800)

Wcan as well calculate the economic value added to Axon.

Calculationof NOPAT

Operating profit

(133,000)

Add: development costs

77,000

Less: 1 year amortization on development costs

-77,000

(133,000)

Tax

0

NOPAT

(133,000)

Calculationof Economic Value of Net Assets

Replacement costs

57,000

Add: investment

2,070

Economic value

59,070

Calculationof EVA

NOPAT

(133,000)

Capital charge (12%*59,070)

-7,088

EVA

(140,088)

  1. A Valuation Based on Market Multiples

Toperform a valuation based on market multiples, one needs to considerwhat market multiples imply. Here, we consider three more companieswithin the same industry as Axon and determine their price-earningsratio and the earnings per share of the companies (Pinto,Henry, Robinson, &amp Stowe, 2015). Inthis case, I will consider Amgen Inc., Genentech Inc., and BiogenInc.

Details

Axon

Amgen

Genentech

Biogen

Price ($)

$ 11.76

$ 146.45

$ 85

$ 229.02

EPS

$ 0.12

$ 9.45

$ 1.98

$ 16.28

P/E

98 times

16 times

43 times

14 times

Basedon the above table, it is evident that Axon has the highestprice-earnings ratio among its competitors. It is, therefore, aprofitable and worthwhile investment portfolio.

  1. Judgment of Value

Itwould be worthwhile for any investor who would like to invest inAxovant Sciences Ltd. This is because despite the company having thelowest earnings per share, the company’s share price is lower thanits competitors as seen above making it realize the highest earningsper share. Analysts recommend an investor to buy shares when thestock price is low and sell them when the share price is highest inorder to realize huge returns. As a financial analyst, I wouldstrongly advise any investor to buy shares of Axon today.

AppendixesAppendix1: Axon’s Stock Summary

BUY

Target Price ($)

35

Rating

Overweight

Last Price ($)

12.25

&nbsp

Morningstar code

XNYS: AXON

NYSE Code

NYSE: AXON

Avg. vol

327,514

Vol

673,478

52-week range

8.86-22.88

Day Range

11.42-12.51

Appendix2: Axon Rating SummaryAppendix3: Axon Stock ChartAppendix4: Cash Flow Statement of Axon

Operating Activities

Net Income before Extra-ordinaries

(21.05M)

Other funds

18.3M

Funds from operations

(2.75M)

Changes in WC

2.07M

Changes in other assets/ liabilities

1.6M

Net operating cash flows

682,498

Investing Activities

&nbsp

Capital expenditures

&nbsp

&nbsp

-9,122

Other uses

(5M)

Net investing cash flows

(5.01M)

Financing Activities

&nbsp

Changes in capital stock

&nbsp

(5M)

Sale of common and preferred stock

(5M)

Proceeds from stock options

(5M)

Other funds

691,620

Other uses

-25,460

Other sources

717,080

Net financing cash flows

5.69M

Free cash flows

-591,620

References

Pinto,J., Henry, E., Robinson, T., &amp Stowe, J. (2015). Equity AssetValuation, Third Ed. Wiley: John Wiley &amp Sons. ISBN9781119104261. Retrieved on 25thJune 2016 fromhttp://www.wiley.com/WileyCDA/WileyTitle/productCd-1119104262.html/