Economy Is Pfizer Inc. (NYSE: PFE) trading at a 49%...

Is Pfizer Inc. (NYSE: PFE) trading at a 49% discount?

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<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "In this article we will appreciate the intrinsic value of Pfizer Inc. (NYSE: PFE) by discounting the expected future cash flows to the current value. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple! “Data-reactid =” 27 “> In this article, we estimate the intrinsic value of Pfizer Inc. (NYSE: PFE) based on expected future cash flows and discounting. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is very simple!

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "However, note that there are many ways to appreciate The Company value and a DCF are just one method. Anyone who wants to learn more about intrinsic value should read this Simply Wall St analysis model, “data-reactid =” 28 “> Note, however, that there are many ways to appreciate a company’s value, and a DCF is just one method. If you want to learn more about its intrinsic value, read the Simply Wall St- analysis model.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Pfizer “data-reactid =” 29 “> Check out our latest analysis for Pfizer

The calculation

We use a so-called 2-step model, which simply means that we have two different growth periods for the company’s cash flows. Generally, the first stage is a higher growth and the second stage is a lower growth phase. First, we need to get estimates of the cash flows over the next ten years. Wherever possible, we use analyst estimates. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or the most recently reported value. We expect companies with shrinking free cash flow to slow down their rate of shrinkage and that companies with growing free cash flow will slow down their growth rate during this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

A DCF is all about the idea that a dollar is worth less in the future than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

2020202120222023202420252026202720282029
FCF Leverage ($ million) $ 15.6 billion$ 14.5 billion$ 18.7 billion$ 20.0 billion$ 21.7 billion$ 22.9 billion$ 23.9 billion$ 24.8 billion$ 25.6 billion$ 26.3 billion
Growth rate Estimated sourceAnalyst x4Analyst x3Analyst x1Analyst x1Analyst x1Est @ 5.75%Est @ 4.55%3.7% estimateEstimate at 3.12%2.7% estimate
Present value ($. Million) reduced by 6.6% $ 14.6 thousand$ 12.8 thousand$ 15.4 thousand$ 15.5 thousand$ 15.7 thousand$ 15.6 thousand$ 15.3 thousand$ 14.9 thousand$ 14.4 thousand$ 13.9 thousand

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = US $ 148b “data-reactid =” 36 “>(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 148 billion

The second level is also known as Terminal Value. This is the company’s cash flow after the first stage. A very conservative growth rate is used for several reasons, which a country’s GDP growth cannot exceed. In this case, we used the interest rate on 10-year government bonds (1.7%) to estimate future growth. As in the 10-year growth period, the future cash flows are discounted to their current value with an equity cost rate of 6.6%.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Terminal value (TV)= FCF2029 × (1 + g) ≤ (r – g) = USD 26 billion × (1 + 1.7%) ≤ 6.6% – 1.7%) = USD 550 billion data-reactid = 38Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = $ 26 billion × (1 + 1.7%) ÷ 6.6% – 1.7%) = $ 550 billion

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Present value of the final value (PVTV)= TV / (1 + r)10= $ 550 billion (1 + 6.6%)10= US $ 290b “data-reactid =” 39 “>Present value of the final value (PVTV)= TV / (1 + r)10= $ 550 billion (1 + 6.6%)10= $ 290 billion

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $ 438 billion. To get the intrinsic value per share, we divide it by the total number of shares issued. Compared to the current share price of $ 40.1, the company appears to be quite undervalued at a discount of 49% compared to the current share price. However, ratings are inaccurate instruments, more like a telescope – move a few degrees and land in another galaxy. Remember that.

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NYSE: PFE Intrinsic Value, January 15, 2020

NYSE: PFE Intrinsic Value, January 15, 2020

Important assumptions

The most important parameters for a discounted cash flow are now the discount rate and, of course, the actual cash flows. If you disagree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the potential cyclicality of an industry or the future capital requirements of a company and therefore does not provide a complete overview of a company’s potential performance. Given that we consider Pfizer to be potential shareholders, the cost of equity is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that make up debt. We used 6.6% in this calculation, based on a leverage beta of 0.895. Beta is a measure of the volatility of a share compared to the overall market. We get our beta from the industry-standard beta of globally comparable companies with a defined limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

While evaluating a company is important, it shouldn’t be the only metric you look for when researching a company. The DCF model is not a perfect tool for stock valuation. Rather, it should serve as a guide to “What assumptions must be made for this stock to be under or overvalued?” If a company grows at a different growth rate or if the cost of equity or risk-free interest rates changes significantly, the output can look very different. What is the reason why the stock price differs from the intrinsic value? For Pfizer, I have put together three basic factors that you should examine further:

  1. Financial health: Does PFE have a healthy balance? Check out our free balance sheet analysis with six simple reviews of key factors such as leverage and risk.
  2. Future result: What is PFE’s growth rate compared to its competitors and the broader market? Find out more about analyst consensus numbers for the coming years by accessing our free graph of analyst growth expectations.
  3. Other high quality alternatives: Are there any other high quality stocks you could hold instead of PFE? Check out our interactive list of high quality stocks to get an idea of ​​what else is missing!

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "PS. Simply Wall St updates its DCF calculation for each US stock every day, so if you just want to find the intrinsic value of another stock Search here, “data-reactid =” 65 “> PS. Simply Wall St updates its DCF calculation for each US stock daily, so if you want to find the intrinsic value of another stock, just search here.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at [email protected], This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.“data-reactid =” 66 “>If you discover an error that justifies a correction, please contact the editorial team at [email protected] This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.

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