# Thermo Fisher Scientific Inc. (TMO)

## 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)

Thermo Fisher Scientific Inc., free cash flow to equity (FCFE) forecast

USD \$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.08%
01 FCFE0 2,279
1 FCFE1 2,470  = 2,279 × (1 + 8.39%) 2,185
2 FCFE2 2,693  = 2,470 × (1 + 9.01%) 2,106
3 FCFE3 2,952  = 2,693 × (1 + 9.63%) 2,042
4 FCFE4 3,255  = 2,952 × (1 + 10.25%) 1,991
5 FCFE5 3,609  = 3,255 × (1 + 10.87%) 1,952
5 Terminal value (TV5) 181,279  = 3,609 × (1 + 10.87%) ÷ (13.08%10.87%) 98,056
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock 108,332
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock (per share) \$270.84
Current share price \$286.21

Based on: 10-K (filing date: 2019-02-27).

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 2.52% Expected rate of return on market portfolio2 E(RM) 11.77% Systematic risk (β) of Thermo Fisher Scientific Inc.’s common stock βTMO 1.14 Required rate of return on Thermo Fisher Scientific Inc.’s common stock3 rTMO 13.08%

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

3 rTMO = RF + βTMO [E(RM) – RF]
= 2.52% + 1.14 [11.77%2.52%]
= 13.08%

### FCFE Growth Rate (g)

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

Thermo Fisher Scientific Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD \$ in millions)
Dividends declared 274  238  237  240  241
Net income 2,938  2,225  2,022  1,975  1,894
Revenues 24,358  20,918  18,274  16,965  16,890
Total assets 56,232  56,669  45,908  40,889  42,852
Shareholders’ equity 27,586  25,413  21,539  21,350  20,548
Ratios
Retention rate1 0.91 0.89 0.88 0.88 0.87
Profit margin2 12.06% 10.64% 11.06% 11.64% 11.22%
Asset turnover3 0.43 0.37 0.40 0.41 0.39
Financial leverage4 2.04 2.23 2.13 1.92 2.09
Averages
Retention rate 0.89
Profit margin 11.32%
Asset turnover 0.40
Financial leverage 2.08
Growth rate of FCFE (g)5 8.39%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-28), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-26).

2018 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (2,938274) ÷ 2,938 = 0.91

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 2,938 ÷ 24,358 = 12.06%

3 Asset turnover = Revenues ÷ Total assets
= 24,358 ÷ 56,232 = 0.43

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 56,232 ÷ 27,586 = 2.04

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.89 × 11.32% × 0.40 × 2.08 = 8.39%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (114,479 × 13.08%2,279) ÷ (114,479 + 2,279) = 10.87%

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

#### FCFE growth rate (g) forecast

Thermo Fisher Scientific Inc., H-model

Year Value gt
1 g1 8.39%
2 g2 9.01%
3 g3 9.63%
4 g4 10.25%
5 and thereafter g5 10.87%

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)
= 8.39% + (10.87%8.39%) × (2 – 1) ÷ (5 – 1) = 9.01%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 8.39% + (10.87%8.39%) × (3 – 1) ÷ (5 – 1) = 9.63%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 8.39% + (10.87%8.39%) × (4 – 1) ÷ (5 – 1) = 10.25%