Pfizer Inc. (PFE)

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)

Pfizer Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 9.20%
01 FCFF0 14,864
1 FCFF1 15,211  = 14,864  × (1 + 2.33%) 13,929
2 FCFF2 15,590  = 15,211  × (1 + 2.49%) 13,074
3 FCFF3 16,003  = 15,590  × (1 + 2.65%) 12,290
4 FCFF4 16,453  = 16,003  × (1 + 2.81%) 11,571
5 FCFF5 16,942  = 16,453  × (1 + 2.97%) 10,911
5 Terminal value (TV5) 280,124  = 16,942  × (1 + 2.97%) ÷ (9.20%2.97%) 180,407
Intrinsic value of Pfizer Inc.’s capital 242,181
Less: Preferred stock, no par value, at stated value (book value) 19
Less: Debt (fair value) 44,091
Intrinsic value of Pfizer Inc.’s common stock 198,071

Intrinsic value of Pfizer Inc.’s common stock (per share) \$35.81
Current share price \$36.46

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.

Weighted Average Cost of Capital (WACC)

Pfizer Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 201,662  0.82 10.51%
Preferred stock, no par value, at stated value (book value) 19  0.00 6.25%
Debt (fair value) 44,091  0.18 3.22% = 3.88% × (1 – 17.02%)

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

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 5,531,048,353 × \$36.46 = \$201,662,022,950.38

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
= (10.90% + 13.10% + 13.40% + 22.20% + 25.50%) ÷ 5 = 17.02%

WACC = 9.20%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Pfizer Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Interest expense 1,316  1,270  1,186  1,199  1,360
Discontinued operations, net of tax 17  11  49
Net income attributable to Pfizer Inc. 11,153  21,308  7,215  6,960  9,135

Effective income tax rate (EITR)1 10.90% 13.10% 13.40% 22.20% 25.50%

Interest expense, after tax2 1,173  1,104  1,027  933  1,013
Add: Cash dividends declared, preferred stock
Add: Cash dividends declared, common stock 8,060  7,789  7,446  7,141  6,690
Interest expense (after tax) and dividends 9,234  8,894  8,475  8,076  7,705

EBIT(1 – EITR)3 12,317  22,410  8,225  7,882  10,099

Short-term borrowings, including current portion of long-term debt 8,831  9,953  10,688  10,160  5,141
Long-term debt, excluding current portion 32,909  33,538  31,398  28,818  31,541
Total Pfizer Inc. shareholders’ equity 63,407  71,308  59,544  64,720  71,301
Total capital 105,147  114,799  101,630  103,698  107,983
Financial Ratios
Retention rate (RR)4 0.25 0.60 -0.03 -0.02 0.24
Return on invested capital (ROIC)5 11.71% 19.52% 8.09% 7.60% 9.35%
Averages
RR 0.21
ROIC 11.26%

FCFF growth rate (g)6 2.33%

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

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,316 × (1 – 10.90%) = 1,173

3 EBIT(1 – EITR) = Net income attributable to Pfizer Inc. – Discontinued operations, net of tax + Interest expense, after tax
= 11,1539 + 1,173 = 12,317

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [12,3179,234] ÷ 12,317 = 0.25

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 12,317 ÷ 105,147 = 11.71%

6 g = RR × ROIC
= 0.21 × 11.26% = 2.33%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (245,772 × 9.20%14,864) ÷ (245,772 + 14,864) = 2.97%

where:
Total capital, fair value0 = current fair value of Pfizer Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Pfizer Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Pfizer Inc.’s capital

FCFF growth rate (g) forecast

Pfizer Inc., H-model

Year Value gt
1 g1 2.33%
2 g2 2.49%
3 g3 2.65%
4 g4 2.81%
5 and thereafter g5 2.97%

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)
= 2.33% + (2.97%2.33%) × (2 – 1) ÷ (5 – 1) = 2.49%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.33% + (2.97%2.33%) × (3 – 1) ÷ (5 – 1) = 2.65%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.33% + (2.97%2.33%) × (4 – 1) ÷ (5 – 1) = 2.81%