Pfizer Valuation Exercise
Projected (2004-2009) financial results for the drug manufacturing company, Pfizer (PFE), are presented in the following table:
Pfizer / Horizon Period / Terminal Year($ million) / 2004 / 2005 / 2006 / 2007 / 2008 / 2009
Beginning-year balance sheet
Beginning net working capital... / $ 6,084 / $ 8,396 / $ 9,529 / $ 10,816 / $ 12,276 / $ 12,706
Beginning net long-term assets... / 87,034 / 120,107 / 136,321 / 154,725 / 175,613 / 181,759
Total assets...... / 93,118 / 128,503 / 145,851 / 165,541 / 187,889 / 194,465
Beginning net debt...... / 27,741 / 38,283 / 43,451 / 49,317 / 55,974 / 57,933
Beginning shareholders equity... / 65,377 / 90,220 / 102,400 / 116,224 / 131,914 / 136,531
Total net capital...... / 93,118 / 128,503 / 145,851 / 165,541 / 187,889 / 194,465
Income statement
Sales...... / 54,226 / 62,359 / 70,778 / 80,333 / 91,178 / 94,369
Net operating profits after tax (NOPAT) / 10,174 / 11,700 / 13,280 / 15,073 / 17,108 / 17,706
Net interest after tax...... / 1,387 / 1,914 / 2,173 / 2,466 / 2,799 / 2,897
Net income...... / 8,787 / 9,786 / 11,107 / 12,607 / 14,309 / 14,810
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.
- This means that your statement of cash flows will appears as follows:
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.
2.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.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.
3.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.