# Philip Morris International Inc. (PM)

## 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)

Philip Morris International Inc., 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 9.54%
01 FCFE0 5,813
1 FCFE1 5,813  = 5,813 × (1 + 0.00%) 5,307
2 FCFE2 5,813  = 5,813 × (1 + 0.00%) 4,844
3 FCFE3 5,813  = 5,813 × (1 + 0.00%) 4,422
4 FCFE4 5,813  = 5,813 × (1 + 0.00%) 4,037
5 FCFE5 5,813  = 5,813 × (1 + 0.00%) 3,685
5 Terminal value (TV5) 60,905  = 5,813 × (1 + 0.00%) ÷ (9.54%0.00%) 38,610
Intrinsic value of Philip Morris International Inc.’s common stock 60,905

Intrinsic value of Philip Morris International Inc.’s common stock (per share) \$39.14
Current share price \$84.68

Based on: 10-K (filing date: 2019-02-07).

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 2.02% Expected rate of return on market portfolio2 E(RM) 11.22% Systematic risk of Philip Morris International Inc.’s common stock βPM 0.82 Required rate of return on Philip Morris International Inc.’s common stock3 rPM 9.54%

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 rPM = RF + βPM [E(RM) – RF]
= 2.02% + 0.82 [11.22%2.02%]
= 9.54%

### FCFE Growth Rate (g)

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

Philip Morris International 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)
Dividends declared 6,994  6,573  6,412  6,280  6,087
Net earnings attributable to PMI 7,911  6,035  6,967  6,873  7,493
Revenues including excise taxes 79,823  78,098  74,953  73,908  80,106
Total assets 39,801  42,968  36,851  33,956  35,187
Total PMI stockholders’ deficit (12,459) (12,086) (12,688) (13,244) (12,629)
Financial Ratios
Retention rate1 0.12 -0.09 0.08 0.09 0.19
Profit margin2 9.91% 7.73% 9.30% 9.30% 9.35%
Asset turnover3 2.01 1.82 2.03 2.18 2.28
Financial leverage4
Averages
Retention rate 0.12
Profit margin 9.12%
Asset turnover 2.06
Financial leverage

FCFE growth rate (g)5 0.00%

Based on: 10-K (filing date: 2019-02-07), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-17), 10-K (filing date: 2015-02-20).

2018 Calculations

1 Retention rate = (Net earnings attributable to PMI – Dividends declared) ÷ Net earnings attributable to PMI
= (7,9116,994) ÷ 7,911 = 0.12

2 Profit margin = 100 × Net earnings attributable to PMI ÷ Revenues including excise taxes
= 100 × 7,911 ÷ 79,823 = 9.91%

3 Asset turnover = Revenues including excise taxes ÷ Total assets
= 79,823 ÷ 39,801 = 2.01

4 Financial leverage = Total assets ÷ Total PMI stockholders’ deficit
= 39,801 ÷ -12,459 =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.12 × 9.12% × 2.06 × = 0.00%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (131,751 × 9.54%5,813) ÷ (131,751 + 5,813) = 0.00%

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

#### FCFE growth rate (g) forecast

Philip Morris International Inc., H-model

Year Value gt
1 g1 0.00%
2 g2 0.00%
3 g3 0.00%
4 g4 0.00%
5 and thereafter g5 0.00%

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)
= 0.00% + (0.00%0.00%) × (2 – 1) ÷ (5 – 1) = 0.00%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 0.00% + (0.00%0.00%) × (3 – 1) ÷ (5 – 1) = 0.00%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 0.00% + (0.00%0.00%) × (4 – 1) ÷ (5 – 1) = 0.00%