Answer first
The operating thesis is unchanged. Cash conversion is the valuation issue. The DCF charges both instrument additions and other PP&E, then deducts net debt.
$49.01, -51.5%.
$101.09, 0.1%.
$154.04, 52.5%.
Knee share loss while recurring capital and leverage consume cash.
Company specific valuation
Primary: five year enterprise normalized FCFF DCF. Starting FCFF is $1.450 billion.
Why: Orthopedic procedure growth requires recurring instruments, inventory, robotics, working capital, and sales support.
Cross checks: EV to normalized FCF is about $105.50. Frozen normalized EPS P E is $111.25. SOTP is rejected because product profit and capital are not disclosed.
DCF scenarios
| Case | Probability | FCFF growth | WACC | Terminal | Net debt | Shares | Target |
|---|---|---|---|---|---|---|---|
| Bear | 25% | 0.0% | 9.5% | 1.0% | $7.2B | 190.0M | $49.01 |
| Base | 50% | 4.0% | 8.5% | 2.0% | $5.8B | 188.0M | $101.09 |
| Bull | 25% | 7.0% | 8.0% | 2.5% | $4.5B | 184.0M | $154.04 |
Weighted value $101.31. Reference price and operating evidence are frozen.
Five pillar decomposition
| Pillar | Weight | Prior | Revised |
|---|---|---|---|
| Business Quality | 30% | 5.3 | 5.3 |
| Management Quality | 15% | 6.5 | 6.5 |
| Industry Tailwind | 15% | 7.0 | 7.0 |
| Valuation and Margin of Safety | 30% | 6.5 | 4.5 |
| Risk and Asymmetry | 10% | 5.5 | 3.5 |
| Weighted average | 100% | 6.115 | 5.315 |
Old versus new
Original final targets were $73.15, $111.25, and $144.75. Revised DCF values are $49.01, $101.09, and $154.04. Weighted value changes from $110.10 to $101.31. Decision changes from starter and watch to pass and watch.
Downloads
Revised assessment PDFRevised deep teaching reportRevised formula workbookRevised source workspaceOriginal immutable assessment PDFOriginal immutable deep teaching reportOriginal files remain unchanged.