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Danaher Corp. (DHR)


Present Value of Free Cash Flow to the Firm (FCFF)

Difficulty: Intermediate

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Danaher Corp., free cash flow to the firm (FCFF) forecast

USD $ in thousands, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 10.91%
01 FCFF0 3,485,580 
1 FCFF1 3,701,381  = 3,485,580  × (1 + 6.19%) 3,337,276 
2 FCFF2 3,940,723  = 3,701,381  × (1 + 6.47%) 3,203,558 
3 FCFF3 4,206,382  = 3,940,723  × (1 + 6.74%) 3,083,144 
4 FCFF4 4,501,519  = 4,206,382  × (1 + 7.02%) 2,974,901 
5 FCFF5 4,829,747  = 4,501,519  × (1 + 7.29%) 2,877,837 
5 Terminal value (TV5) 143,195,648  = 4,829,747  × (1 + 7.29%) ÷ (10.91%7.29%) 85,324,078 
Intrinsic value of Danaher Corp.’s capital 100,800,794 
Less: Notes payable and long-term debt (fair value) 10,042,400 
Intrinsic value of Danaher Corp.’s common stock 90,758,394 
Intrinsic value of Danaher Corp.’s common stock (per share) $126.77
Current share price $130.32

Based on: 10-K (filing date: 2019-02-21).

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.


Weighted Average Cost of Capital (WACC)

Danaher Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 93,300,473  0.90 11.97%
Notes payable and long-term debt (fair value) 10,042,400  0.10 1.10% = 1.38% × (1 – 20.02%)

Based on: 10-K (filing date: 2019-02-21).

1 USD $ in thousands

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 715,933,649 × $130.32 = $93,300,473,137.68

   Notes payable and long-term debt (fair value). See Details »

2 Required rate of return on equity is estimated by using CAPM. See Details »

   Required rate of return on debt. See Details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (19.30% + 16.10% + 17.50% + 21.80% + 25.40%) ÷ 5 = 20.02%

WACC = 10.91%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Danaher Corp., PRAT model

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Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in thousands)
Interest expense 157,400  162,700  184,400  162,800  122,700 
Earnings from discontinued operations, net of income taxes –  22,300  400,300  758,700  – 
Net earnings 2,650,900  2,492,100  2,553,700  3,357,400  2,598,400 
Effective income tax rate (EITR)1 19.30% 16.10% 17.50% 21.80% 25.40%
Interest expense, after tax2 127,022  136,505  152,130  127,310  91,534 
Add: Dividends declared 448,500  389,500  393,600  376,400  280,700 
Interest expense (after tax) and dividends 575,522  526,005  545,730  503,710  372,234 
EBIT(1 – EITR)3 2,777,922  2,606,305  2,305,530  2,726,010  2,689,934 
Notes payable and current portion of long-term debt 51,800  194,700  2,594,800  845,200  71,900 
Long-term debt, excluding current portion 9,688,500  10,327,400  9,674,200  12,025,200  3,401,500 
Total Danaher stockholders’ equity 28,214,400  26,358,200  23,002,800  23,690,300  23,378,100 
Total capital 37,954,700  36,880,300  35,271,800  36,560,700  26,851,500 
Ratios
Retention rate (RR)4 0.79 0.80 0.76 0.82 0.86
Return on invested capital (ROIC)5 7.32% 7.07% 6.54% 7.46% 10.02%
Averages
RR 0.81
ROIC 7.68%
Growth rate of FCFF (g)6 6.19%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 157,400 × (1 – 19.30%) = 127,022

3 EBIT(1 – EITR) = Net earnings – Earnings from discontinued operations, net of income taxes + Interest expense, after tax
= 2,650,9000 + 127,022 = 2,777,922

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,777,922575,522] ÷ 2,777,922 = 0.79

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,777,922 ÷ 37,954,700 = 7.32%

6 g = RR × ROIC
= 0.81 × 7.68% = 6.19%


FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (103,342,873 × 10.91%3,485,580) ÷ (103,342,873 + 3,485,580) = 7.29%

where:
Total capital, fair value0 = current fair value of Danaher Corp.’s debt and equity (USD $ in thousands)
FCFF0 = last year Danaher Corp.’s free cash flow to the firm (USD $ in thousands)
WACC = weighted average cost of Danaher Corp.’s capital


FCFF growth rate (g) forecast

Danaher Corp., H-model

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Year Value gt
1 g1 6.19%
2 g2 6.47%
3 g3 6.74%
4 g4 7.02%
5 and thereafter g5 7.29%

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)
= 6.19% + (7.29%6.19%) × (2 – 1) ÷ (5 – 1) = 6.47%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 6.19% + (7.29%6.19%) × (3 – 1) ÷ (5 – 1) = 6.74%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 6.19% + (7.29%6.19%) × (4 – 1) ÷ (5 – 1) = 7.02%