On Tuesday, Morgan Stanley reaffirmed its Overweight rating on shares of Hutchison China MediTech Ltd. (NASDAQ: NASDAQ:HCM) with a price target of $17.50. The financial firm announced the discontinuation of a previously published Research Tactical Idea on the company as of May 8, 2024. The analyst stated that this tactical idea should no longer be considered by investors.
The Overweight rating on Hutchmed has been supported by a Discounted Cash Flow (DCF) analysis. Morgan Stanley's approach involved a weighted average cost of capital (WACC) of 12.25% and a terminal growth rate of 2%. These figures are consistent with the global biotechnology sector covered by Morgan Stanley.
The DCF methodology is a valuation technique widely used in finance that calculates the present value of an investment based on its expected future cash flows. The use of a 12.25% WACC reflects the firm's assessment of the risk and time value of money associated with Hutchmed's future cash flows.
The terminal growth rate of 2% applied in the valuation is in line with the growth expectations for other biotech companies within Morgan Stanley's coverage. This growth rate is used to estimate the company's cash flows beyond the forecast period and into perpetuity.
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