# Thermo Fisher Scientific Inc. (NYSE:TMO)

## 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)

Thermo Fisher Scientific 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 10.12%
01 FCFE0 9,570
1 FCFE1 10,603 = 9,570 × (1 + 10.79%) 9,628
2 FCFE2 11,593 = 10,603 × (1 + 9.34%) 9,560
3 FCFE3 12,506 = 11,593 × (1 + 7.88%) 9,365
4 FCFE4 13,309 = 12,506 × (1 + 6.42%) 9,050
5 FCFE5 13,969 = 13,309 × (1 + 4.96%) 8,626
5 Terminal value (TV5) 284,175 = 13,969 × (1 + 4.96%) ÷ (10.12%4.96%) 175,482
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock 221,711

Intrinsic value of Thermo Fisher Scientific Inc.’s common stock (per share) \$563.01
Current share price \$494.38

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.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.12% Expected rate of return on market portfolio2 E(RM) 11.71% Systematic risk of Thermo Fisher Scientific Inc.’s common stock βTMO 0.83 Required rate of return on Thermo Fisher Scientific Inc.’s common stock3 rTMO 10.12%

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 rTMO = RF + βTMO [E(RM) – RF]
= 2.12% + 0.83 [11.71%2.12%]
= 10.12%

### FCFE Growth Rate (g)

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

Thermo Fisher Scientific 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)
Dividends declared 350  304  274  238  237
Net income 6,375  3,696  2,938  2,225  2,022
Revenues 32,218  25,542  24,358  20,918  18,274
Total assets 69,052  58,381  56,232  56,669  45,908
Shareholders’ equity 34,507  29,675  27,586  25,413  21,539
Financial Ratios
Retention rate1 0.95 0.92 0.91 0.89 0.88
Profit margin2 19.79% 14.47% 12.06% 10.64% 11.06%
Asset turnover3 0.47 0.44 0.43 0.37 0.40
Financial leverage4 2.00 1.97 2.04 2.23 2.13
Averages
Retention rate 0.91
Profit margin 13.60%
Asset turnover 0.42
Financial leverage 2.07

FCFE growth rate (g)5 10.79%

Based on: 10-K (filing date: 2021-02-25), 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-28), 10-K (filing date: 2017-02-28).

2020 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (6,375350) ÷ 6,375
= 0.95

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 6,375 ÷ 32,218
= 19.79%

3 Asset turnover = Revenues ÷ Total assets
= 32,218 ÷ 69,052
= 0.47

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 69,052 ÷ 34,507
= 2.00

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.91 × 13.60% × 0.42 × 2.07
= 10.79%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (194,684 × 10.12%9,570) ÷ (194,684 + 9,570)
= 4.96%

where:
Equity market value0 = current market value of Thermo Fisher Scientific Inc.’s common stock (US\$ in millions)
FCFE0 = the last year Thermo Fisher Scientific Inc.’s free cash flow to equity (US\$ 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 10.79%
2 g2 9.34%
3 g3 7.88%
4 g4 6.42%
5 and thereafter g5 4.96%

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)
= 10.79% + (4.96%10.79%) × (2 – 1) ÷ (5 – 1)
= 9.34%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.79% + (4.96%10.79%) × (3 – 1) ÷ (5 – 1)
= 7.88%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.79% + (4.96%10.79%) × (4 – 1) ÷ (5 – 1)
= 6.42%