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# Celgene Corp. (CELG)

## 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)

Celgene Corp., 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 15.27%
01 FCFE0 9,293
1 FCFE1 12,917  = 9,293 × (1 + 38.99%) 11,206
2 FCFE2 16,786  = 12,917 × (1 + 29.96%) 12,635
3 FCFE3 20,299  = 16,786 × (1 + 20.93%) 13,255
4 FCFE4 22,713  = 20,299 × (1 + 11.89%) 12,867
5 FCFE5 23,362  = 22,713 × (1 + 2.86%) 11,482
5 Terminal value (TV5) 193,665  = 23,362 × (1 + 2.86%) ÷ (15.27%2.86%) 95,181
Intrinsic value of Celgene Corp.’s common stock 156,626

Intrinsic value of Celgene Corp.’s common stock (per share) \$220.07
Current share price \$108.24

Based on: 10-K (filing date: 2019-02-26).

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 2.25% Expected rate of return on market portfolio2 E(RM) 11.45% Systematic risk of Celgene Corp.’s common stock βCELG 1.41 Required rate of return on Celgene Corp.’s common stock3 rCELG 15.27%

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 rCELG = RF + βCELG [E(RM) – RF]
= 2.25% + 1.41 [11.45%2.25%]
= 15.27%

### FCFE Growth Rate (g)

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

Celgene Corp., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Net income 4,046  2,940  1,999  1,602  2,000
Net product sales 15,265  12,973  11,185  9,161  7,564
Total assets 35,480  30,141  28,086  27,053  17,340
Stockholders’ equity 6,161  6,921  6,599  5,919  6,525
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 26.51% 22.66% 17.87% 17.49% 26.44%
Asset turnover3 0.43 0.43 0.40 0.34 0.44
Financial leverage4 5.76 4.36 4.26 4.57 2.66
Averages
Retention rate 1.00
Profit margin 22.19%
Asset turnover 0.41
Financial leverage 4.32

FCFE growth rate (g)5 38.99%

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-07), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-20).

2018 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Net product sales
= 100 × 4,046 ÷ 15,265 = 26.51%

3 Asset turnover = Net product sales ÷ Total assets
= 15,265 ÷ 35,480 = 0.43

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 35,480 ÷ 6,161 = 5.76

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 22.19% × 0.41 × 4.32 = 38.99%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (77,036 × 15.27%9,293) ÷ (77,036 + 9,293) = 2.86%

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

#### FCFE growth rate (g) forecast

Celgene Corp., H-model

Year Value gt
1 g1 38.99%
2 g2 29.96%
3 g3 20.93%
4 g4 11.89%
5 and thereafter g5 2.86%

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)
= 38.99% + (2.86%38.99%) × (2 – 1) ÷ (5 – 1) = 29.96%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 38.99% + (2.86%38.99%) × (3 – 1) ÷ (5 – 1) = 20.93%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 38.99% + (2.86%38.99%) × (4 – 1) ÷ (5 – 1) = 11.89%