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Pfizer Inc. (PFE)


Present Value of Free Cash Flow to Equity (FCFE)

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 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)

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

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 10.51%
01 FCFE0 12,696 
1 FCFE1 13,176  = 12,696 × (1 + 3.78%) 11,923 
2 FCFE2 13,682  = 13,176 × (1 + 3.84%) 11,203 
3 FCFE3 14,214  = 13,682 × (1 + 3.89%) 10,533 
4 FCFE4 14,775  = 14,214 × (1 + 3.95%) 9,907 
5 FCFE5 15,367  = 14,775 × (1 + 4.00%) 9,324 
5 Terminal value (TV5) 245,624  = 15,367 × (1 + 4.00%) ÷ (10.51%4.00%) 149,033 
Intrinsic value of Pfizer Inc.’s common stock 201,924 
Intrinsic value of Pfizer Inc.’s common stock (per share) $36.51
Current share price $36.69

Based on: 10-K (filing date: 2019-02-28).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.08%
Expected rate of return on market portfolio2 E(RM) 11.62%
Systematic risk (β) of Pfizer Inc.’s common stock βPFE 0.88
Required rate of return on Pfizer Inc.’s common stock3 rPFE 10.51%

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).

Calculations

2 See Details »

3 rPFE = RF + βPFE [E(RM) – RF]
= 2.08% + 0.88 [11.62%2.08%]
= 10.51%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Pfizer Inc., 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 (US$ in millions)
Cash dividends declared, common stock 8,060  7,789  7,446  7,141  6,690 
Cash dividends declared, preferred stock
Net income attributable to Pfizer Inc. 11,153  21,308  7,215  6,960  9,135 
Revenues 53,647  52,546  52,824  48,851  49,605 
Total assets 159,422  171,797  171,615  167,460  169,274 
Total Pfizer Inc. shareholders’ equity 63,407  71,308  59,544  64,720  71,301 
Ratios
Retention rate1 0.28 0.63 -0.03 -0.03 0.27
Profit margin2 20.79% 40.55% 13.65% 14.24% 18.41%
Asset turnover3 0.34 0.31 0.31 0.29 0.29
Financial leverage4 2.51 2.41 2.88 2.59 2.37
Averages
Retention rate 0.22
Profit margin 21.53%
Asset turnover 0.31
Financial leverage 2.55
Growth rate of FCFE (g)5 3.78%

Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-22), 10-K (filing date: 2017-02-23), 10-K (filing date: 2016-02-29), 10-K (filing date: 2015-02-27).

2018 Calculations

1 Retention rate = (Net income attributable to Pfizer Inc. – Cash dividends declared, common stock – Cash dividends declared, preferred stock) ÷ (Net income attributable to Pfizer Inc. – Cash dividends declared, preferred stock)
= (11,1538,0601) ÷ (11,1531) = 0.28

2 Profit margin = 100 × (Net income attributable to Pfizer Inc. – Cash dividends declared, preferred stock) ÷ Revenues
= 100 × (11,1531) ÷ 53,647 = 20.79%

3 Asset turnover = Revenues ÷ Total assets
= 53,647 ÷ 159,422 = 0.34

4 Financial leverage = Total assets ÷ Total Pfizer Inc. shareholders’ equity
= 159,422 ÷ 63,407 = 2.51

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.22 × 21.53% × 0.31 × 2.55 = 3.78%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (202,934 × 10.51%12,696) ÷ (202,934 + 12,696) = 4.00%

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


FCFE growth rate (g) forecast

Pfizer Inc., H-model

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Year Value gt
1 g1 3.78%
2 g2 3.84%
3 g3 3.89%
4 g4 3.95%
5 and thereafter g5 4.00%

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)
= 3.78% + (4.00%3.78%) × (2 – 1) ÷ (5 – 1) = 3.84%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 3.78% + (4.00%3.78%) × (3 – 1) ÷ (5 – 1) = 3.89%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 3.78% + (4.00%3.78%) × (4 – 1) ÷ (5 – 1) = 3.95%