Intrinsic Value Assignment | Homework For You
Pfizer was founded in 1894 by Charles Pfizer and Charles Erhart. By the 1950s, Pfizer was established in Belgium, Brazil, Canada, Cuba, Iran, Mexico, Panama, Puerto Rico, Turkey, and the United Kingdom. The company is headquartered in New York. The stock is listed in NYSE, LSE, Euronext, and Swiss exchanges. During the 1980s and 1990s, Pfizer underwent a period of growth sustained by the discovery and marketing of Zoloft, Lipitor, Norvasc, Zithromax, Aricept, Diflucan, and Viagra. Pfizer has recently grown by mergers, including those with WarnerLambert (2000), with Pharmacia (2003), and with Wyeth (2009). Pfizer had the greatest number of blockbuster products in 2009 with 14, which includes 5 inherited through the acquisition of Wyeth. The majority of Pfizer revenues come from the manufacture and sale of biopharmaceutical products. In 2015, Pfizer entered into a definitive agreement to acquire Hospira Inc., the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars, for $90 per share in cash, for a total enterprise value of approximately $17 billion.
Revenues in 2014 were $49.6 billion, which represented a decrease of 4% compared to 2013. The Research & Development (R&D) expenses went up by $1.7 billion. The income from continuing operations in 2014 was $9.1 billion, compared to $11.4 billion in 2013.
Beta is estimated by regressing the weekly returns of Pfizer on market index DJIA returns during the 5-year period 20102014.
Beta = 0.45
Average return on market index based on 5-year period=11.68%
Risk-free rate is based on the average monthly yield of 10-year treasury bond rate during the period 20122014.
Risk-free rate = 2.18%
Risk premium = 11.68 – 2.18 = 9.5%
Cost of equity = 2.18+0.45*9.5 = 6.46%
The cost of debt is assumed as the yield to maturity on a long-term bond of Pfizer maturing in the year 2038. The yield to maturity is estimated as 5.19%.
Corporate tax rate = 35%
After-tax cost of debt = 5.19 * (1-0.35) = 3.37%
The weights used for estimation of cost of capital are the market value weights of equity and book value weight of debt.
Market value of equity in 2014 = 200,107.6 million
Book value of debt in 2014 = 36,682 million
Total value = 236,789.6 million
The growth rate estimated from both historical and fundamental is approximately 3%. Two-stage growth scenario is assumed in which the net income will grow by 3% in the first stage for 5 years and then by the growth rate of the economy in the stable stage period.
Growth rate in stable period = 2.15%
Growth rate = Reinvestment rate *ROE of pharma industry sector
ROE of pharma industry = 16.4%
Reinvestment rate = 2.15/16.4 = 13%
The reinvestment rate in the stable period is estimated as 13%.
No additional information concerning repayment of old debt and new debt issuance has been provided.
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