Pfizer Valuation Exercise
Projected (2004-2009) financial results for the drug manufacturing company, Pfizer (PFE), are presented
in the following table:
Pfizer
2008
Terminal
Year
2009
$ 10,816
154,725
165,541
$ 12,276
175,613
187,889
$ 12,706
181,759
194,465
43,451
102,400
145,851
49,317
116,224
165,541
55,974
131,914
187,889
57,933
136,531
194,465
62,359
70,778
80,333
91,178
94,369
11,700
1,914
9,786
13,280
2,173
11,107
15,073
2,466
12,607
17,108
2,799
14,309
17,706
2,897
14,810
Horizon Period
2005
2006
2007
2004
Beginning-year balance sheet
Beginning net working capital ........ $ 6,084
Beginning net long-term assets ........ 87,034
Total assets .................................... 93,118
$ 8,396
120,107
128,503
$ 9,529
136,321
145,851
Beginning net debt ......................... 27,741
Beginning shareholders equity ........ 65,377
Total net capital ............................. 93,118
38,283
90,220
128,503
($ million)
Income statement
Sales .............................................. 54,226
Net operating profits after tax
(NOPAT) ..................................... 10,174
Net interest after tax ....................... 1,387
Net income .................................... 8,787
The projected financial results are based on analysts’ assumptions regarding its expected operating results
and its expected balance sheet.
Required
1. Estimate the value of a share of Pfizer common stock using the discounted cash flow (DCF) model and
a 5.8% WACC discount rate. Recall the following procedures when performing your analysis and
computations:
a. The cash flow you will discount are computed just like the statement of cash flows—specifically:
i. Net operating income (loss) after tax (NOPAT) is a cash inflow (outflow)
ii. Asset increases (decreases) are cash outflows (inflows), and liability increases (decreases) are
cash inflows (outflows)
iii. Net working capital (current assets less current liabilities) is an asset, just like any other asset,
including plant assets.
iv. This means that your statement of cash flows will appears as follows:
2.
NOPAT
± Investment in net working capital
± Investment in long-term assets
= Free cash flows to the firm (FCFF)
b. You must discount the cash flows for the forecast period (2004-2008) and the terminal period
(2009) using the 5.8% discount rate as explained in the text. The sum of the present values is the
value of the total company. Subtract the value of the debt to yield the value of total equity. Divide
value of total equity by the number of shares outstanding (7,629 mil. shares) to get the value of an
individual share.
Estimate the value of a share of Pfizer common stock using the residual operating income (ROPI)
model and a 5.8% discount rate. Recall the following procedures when performing your analysis and
computations:
a. The residual income for each year is given by the formula: ROPI = NOPAT – (rw× Net operating
assets at the beginning of the year). For example, residual operating income for 2004 is NOPAT
for 2004 less the net operating assets (working capital plus long-term plant assets) for 2003
multiplied by 5.8%, the discount rate rw.
b.
3.
You must discount your projected residual operating income for the forecast period (2004-2008)
and the terminal period (2009) using the 5.8% discount rate as illustrated in the text. The sum of
the present values of the residual operating income plus the book value of the net operating assets
at the beginning of 2004 is the value of the total company. Subtract the value of the debt to get the
value of total equity. Divide value of total equity by the number of shares outstanding (7,629 mil.
shares) to get the value of an individual share.
Did you obtain the same stock price estimate for parts 1 and 2? (You should have.) Compare your
estimated market price with the Pfizer stock price as of December 31, 2003, of $35.33. Do you believe
the stock is overvalued or undervalued? What factors might you suggest to account for the difference
between your estimated price and the actual stock price on that date? Print a chart of Pfizer stock prices
subsequent to December 31, 2003.