Pfizer Inc. (NYSE:PFE)

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

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 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 7.42%
01 FCFF0 9,421
1 FCFF1 9,679 = 9,421 × (1 + 2.74%) 9,010
2 FCFF2 9,968 = 9,679 × (1 + 2.99%) 8,638
3 FCFF3 10,291 = 9,968 × (1 + 3.24%) 8,302
4 FCFF4 10,650 = 10,291 × (1 + 3.49%) 7,998
5 FCFF5 11,048 = 10,650 × (1 + 3.74%) 7,724
5 Terminal value (TV5) 311,335 = 11,048 × (1 + 3.74%) ÷ (7.42%3.74%) 217,669
Intrinsic value of Pfizer Inc.’s capital 259,342
Less: Preferred stock, no par value, at stated value (book value) 0
Less: Debt (fair value) 48,236
Intrinsic value of Pfizer Inc.’s common stock 211,106

Intrinsic value of Pfizer Inc.’s common stock (per share) \$37.71
Current share price \$38.81

Based on: 10-K (filing date: 2021-02-25).

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) 217,246 0.82 8.33%
Preferred stock, no par value, at stated value (book value) 0 0.00 0.00%
Debt (fair value) 48,236 0.18 3.31% = 3.71% × (1 – 10.68%)

Based on: 10-K (filing date: 2021-02-25).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 5,597,693,867 × \$38.81
= \$217,246,498,978.27

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
= (6.40% + 9.60% + 10.90% + 13.10% + 13.40%) ÷ 5
= 10.68%

WACC = 7.42%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Pfizer 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)
Interest expense 1,449  1,574  1,316  1,270  1,186
Discontinued operations, net of tax 2,631  17
Net income attributable to Pfizer Inc. 9,616  16,273  11,153  21,308  7,215

Effective income tax rate (EITR)1 6.40% 9.60% 10.90% 13.10% 13.40%

Interest expense, after tax2 1,356  1,423  1,173  1,104  1,027
Add: Cash dividends declared, preferred stock —
Add: Cash dividends declared, common stock 8,571  8,174  8,060  7,789  7,446
Interest expense (after tax) and dividends 9,927  9,598  9,234  8,894  8,475

EBIT(1 – EITR)3 8,341  17,692  12,317  22,410  8,225

Short-term borrowings, including current portion of long-term debt 2,703  16,195  8,831  9,953  10,688
Long-term debt, excluding current portion 37,133  35,955  32,909  33,538  31,398
Total Pfizer Inc. shareholders’ equity 63,238  63,143  63,407  71,308  59,544
Total capital 103,074  115,293  105,147  114,799  101,630
Financial Ratios
Retention rate (RR)4 -0.19 0.46 0.25 0.60 -0.03
Return on invested capital (ROIC)5 8.09% 15.35% 11.71% 19.52% 8.09%
Averages
RR 0.22
ROIC 12.55%

FCFF growth rate (g)6 2.74%

Based on: 10-K (filing date: 2021-02-25), 10-K (filing date: 2020-02-27), 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-22), 10-K (filing date: 2017-02-23).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,449 × (1 – 6.40%)
= 1,356

3 EBIT(1 – EITR) = Net income attributable to Pfizer Inc. – Discontinued operations, net of tax + Interest expense, after tax
= 9,6162,631 + 1,356
= 8,341

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [8,3419,927] ÷ 8,341
= -0.19

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 8,341 ÷ 103,074
= 8.09%

6 g = RR × ROIC
= 0.22 × 12.55%
= 2.74%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (265,482 × 7.42%9,421) ÷ (265,482 + 9,421)
= 3.74%

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 2.74%
2 g2 2.99%
3 g3 3.24%
4 g4 3.49%
5 and thereafter g5 3.74%

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)
= 2.74% + (3.74%2.74%) × (2 – 1) ÷ (5 – 1)
= 2.99%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.74% + (3.74%2.74%) × (3 – 1) ÷ (5 – 1)
= 3.24%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.74% + (3.74%2.74%) × (4 – 1) ÷ (5 – 1)
= 3.49%