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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

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.18%
01 FCFE0 2,678 
1 FCFE1 2,921  = 2,678 × (1 + 9.06%) 2,580 
2 FCFE2 3,200  = 2,921 × (1 + 9.56%) 2,498 
3 FCFE3 3,521  = 3,200 × (1 + 10.06%) 2,429 
4 FCFE4 3,893  = 3,521 × (1 + 10.56%) 2,372 
5 FCFE5 4,323  = 3,893 × (1 + 11.05%) 2,328 
5 Terminal value (TV5) 225,843  = 4,323 × (1 + 11.05%) ÷ (13.18%11.05%) 121,604 
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock 133,811 
 
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock (per share) $338.80
Current share price $354.20

Based on: 10-K (filing date: 2020-02-26).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 1.52%
Expected rate of return on market portfolio2 E(RM) 11.81%
Systematic risk of Thermo Fisher Scientific Inc.’s common stock βTMO 1.13
 
Required rate of return on Thermo Fisher Scientific Inc.’s common stock3 rTMO 13.18%

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).

2 See details »

3 rTMO = RF + βTMO [E(RM) – RF]
= 1.52% + 1.13 [11.81%1.52%]
= 13.18%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Thermo Fisher Scientific Inc., PRAT model

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Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Dividends declared 304  274  238  237  240 
Net income 3,696  2,938  2,225  2,022  1,975 
Revenues 25,542  24,358  20,918  18,274  16,965 
Total assets 58,381  56,232  56,669  45,908  40,889 
Shareholders’ equity 29,675  27,586  25,413  21,539  21,350 
Financial Ratios
Retention rate1 0.92 0.91 0.89 0.88 0.88
Profit margin2 14.47% 12.06% 10.64% 11.06% 11.64%
Asset turnover3 0.44 0.43 0.37 0.40 0.41
Financial leverage4 1.97 2.04 2.23 2.13 1.92
Averages
Retention rate 0.90
Profit margin 11.98%
Asset turnover 0.41
Financial leverage 2.06
 
FCFE growth rate (g)5 9.06%

Based on: 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), 10-K (filing date: 2016-02-25).

2019 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (3,696304) ÷ 3,696 = 0.92

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 3,696 ÷ 25,542 = 14.47%

3 Asset turnover = Revenues ÷ Total assets
= 25,542 ÷ 58,381 = 0.44

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 58,381 ÷ 29,675 = 1.97

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.90 × 11.98% × 0.41 × 2.06 = 9.06%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (139,892 × 13.18%2,678) ÷ (139,892 + 2,678) = 11.05%

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

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Year Value gt
1 g1 9.06%
2 g2 9.56%
3 g3 10.06%
4 g4 10.56%
5 and thereafter g5 11.05%

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)
= 9.06% + (11.05%9.06%) × (2 – 1) ÷ (5 – 1) = 9.56%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.06% + (11.05%9.06%) × (3 – 1) ÷ (5 – 1) = 10.06%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.06% + (11.05%9.06%) × (4 – 1) ÷ (5 – 1) = 10.56%