# Amgen Inc. (NASDAQ:AMGN)

## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

Amgen Inc., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.33%
01 FCFE0 12,353
1 FCFE1 16,052 = 12,353 × (1 + 29.94%) 14,682
2 FCFE2 19,688 = 16,052 × (1 + 22.66%) 16,471
3 FCFE3 22,715 = 19,688 × (1 + 15.37%) 17,382
4 FCFE4 24,552 = 22,715 × (1 + 8.09%) 17,184
5 FCFE5 24,750 = 24,552 × (1 + 0.80%) 15,844
5 Terminal value (TV5) 292,634 = 24,750 × (1 + 0.80%) ÷ (9.33%0.80%) 187,338
Intrinsic value of Amgen Inc.’s common stock 268,901

Intrinsic value of Amgen Inc.’s common stock (per share) \$468.02
Current share price \$254.21

Based on: 10-K (filing date: 2021-02-09).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.17% Expected rate of return on market portfolio2 E(RM) 11.71% Systematic risk of Amgen Inc.’s common stock βAMGN 0.75 Required rate of return on Amgen Inc.’s common stock3 rAMGN 9.33%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rAMGN = RF + βAMGN [E(RM) – RF]
= 2.17% + 0.75 [11.71%2.17%]
= 9.33%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Amgen Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends declared on common stock 3,843  3,555  3,482  3,487  3,120
Net income 7,264  7,842  8,394  1,979  7,722
Product sales 24,240  22,204  22,533  21,795  21,892
Total assets 62,948  59,707  66,416  79,954  77,626
Stockholders’ equity 9,409  9,673  12,500  25,241  29,875
Financial Ratios
Retention rate1 0.47 0.55 0.59 -0.76 0.60
Profit margin2 29.97% 35.32% 37.25% 9.08% 35.27%
Asset turnover3 0.39 0.37 0.34 0.27 0.28
Financial leverage4 6.69 6.17 5.31 3.17 2.60
Averages
Retention rate 0.55
Profit margin 34.45%
Asset turnover 0.33
Financial leverage 4.79

FCFE growth rate (g)5 29.94%

Based on: 10-K (filing date: 2021-02-09), 10-K (filing date: 2020-02-12), 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-14).

2020 Calculations

1 Retention rate = (Net income – Dividends declared on common stock) ÷ Net income
= (7,2643,843) ÷ 7,264
= 0.47

2 Profit margin = 100 × Net income ÷ Product sales
= 100 × 7,264 ÷ 24,240
= 29.97%

3 Asset turnover = Product sales ÷ Total assets
= 24,240 ÷ 62,948
= 0.39

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 62,948 ÷ 9,409
= 6.69

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.55 × 34.45% × 0.33 × 4.79
= 29.94%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (146,057 × 9.33%12,353) ÷ (146,057 + 12,353)
= 0.80%

where:
Equity market value0 = current market value of Amgen Inc.’s common stock (US\$ in millions)
FCFE0 = the last year Amgen Inc.’s free cash flow to equity (US\$ in millions)
r = required rate of return on Amgen Inc.’s common stock

#### FCFE growth rate (g) forecast

Amgen Inc., H-model

Year Value gt
1 g1 29.94%
2 g2 22.66%
3 g3 15.37%
4 g4 8.09%
5 and thereafter g5 0.80%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 29.94% + (0.80%29.94%) × (2 – 1) ÷ (5 – 1)
= 22.66%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 29.94% + (0.80%29.94%) × (3 – 1) ÷ (5 – 1)
= 15.37%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 29.94% + (0.80%29.94%) × (4 – 1) ÷ (5 – 1)
= 8.09%