# Thermo Fisher Scientific Inc. (NYSE:TMO)

## 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)

Thermo Fisher Scientific 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 12.37%
01 FCFF0 4,800
1 FCFF1 5,059  = 4,800  × (1 + 5.38%) 4,502
2 FCFF2 5,384  = 5,059  × (1 + 6.43%) 4,264
3 FCFF3 5,787  = 5,384  × (1 + 7.48%) 4,078
4 FCFF4 6,280  = 5,787  × (1 + 8.53%) 3,938
5 FCFF5 6,882  = 6,280  × (1 + 9.58%) 3,841
5 Terminal value (TV5) 270,086  = 6,882  × (1 + 9.58%) ÷ (12.37%9.58%) 150,725
Intrinsic value of Thermo Fisher Scientific Inc.’s capital 171,347
Less: Debt obligations (fair value) 18,666
Intrinsic value of Thermo Fisher Scientific Inc.’s common stock 152,681

Intrinsic value of Thermo Fisher Scientific Inc.’s common stock (per share) \$385.96
Current share price \$429.05

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.

### Weighted Average Cost of Capital (WACC)

Thermo Fisher Scientific Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 169,728  0.90 13.53%
Debt obligations (fair value) 18,666  0.10 1.88% = 2.33% × (1 – 19.48%)

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

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 395,589,400 × \$429.05 = \$169,727,632,070.00

Debt obligations (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
= (9.19% + 9.93% + 8.28% + 35.00% + 35.00%) ÷ 5 = 19.48%

WACC = 12.37%

### FCFF Growth Rate (g)

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

Thermo Fisher Scientific Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense 676  667  592  470  415
Loss from discontinued operations, net of income tax —  —  (3) (4) (5)
Net income 3,696  2,938  2,225  2,022  1,975

Effective income tax rate (EITR)1 9.19% 9.93% 8.28% 35.00% 35.00%

Interest expense, after tax2 614  601  543  305  270
Add: Dividends declared 304  274  238  237  240
Interest expense (after tax) and dividends 918  875  781  542  510

EBIT(1 – EITR)3 4,310  3,539  2,771  2,331  2,250

Short-term obligations and current maturities of long-term obligations 676  1,271  2,135  1,256  1,053
Long-term obligations, excluding current maturities 17,076  17,719  18,873  15,372  11,474
Shareholders’ equity 29,675  27,586  25,413  21,539  21,350
Total capital 47,427  46,576  46,421  38,167  33,877
Financial Ratios
Retention rate (RR)4 0.79 0.75 0.72 0.77 0.77
Return on invested capital (ROIC)5 9.09% 7.60% 5.97% 6.11% 6.64%
Averages
RR 0.76
ROIC 7.08%

FCFF growth rate (g)6 5.38%

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

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 676 × (1 – 9.19%) = 614

3 EBIT(1 – EITR) = Net income – Loss from discontinued operations, net of income tax + Interest expense, after tax
= 3,6960 + 614 = 4,310

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,310918] ÷ 4,310 = 0.79

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,310 ÷ 47,427 = 9.09%

6 g = RR × ROIC
= 0.76 × 7.08% = 5.38%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (188,394 × 12.37%4,800) ÷ (188,394 + 4,800) = 9.58%

where:
Total capital, fair value0 = current fair value of Thermo Fisher Scientific Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Thermo Fisher Scientific Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Thermo Fisher Scientific Inc.’s capital

#### FCFF growth rate (g) forecast

Thermo Fisher Scientific Inc., H-model

Year Value gt
1 g1 5.38%
2 g2 6.43%
3 g3 7.48%
4 g4 8.53%
5 and thereafter g5 9.58%

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)
= 5.38% + (9.58%5.38%) × (2 – 1) ÷ (5 – 1) = 6.43%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.38% + (9.58%5.38%) × (3 – 1) ÷ (5 – 1) = 7.48%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.38% + (9.58%5.38%) × (4 – 1) ÷ (5 – 1) = 8.53%