Projected Yield: ~ 4.02%
Pfizer is the world's largest pharmaceutical firm, with annual sales near $70 billion. Following the acquisition of Wyeth, prescription drugs now account for close to 90% of sales. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation.
I estimated the firm's WACC today at 8.85% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2001 | 7060 |
| 2002 | 8425 |
| 2003 | 9098 |
| 2004 | 13739 |
| 2005 | 12627 |
| 2006 | 15544 |
| 2007 | 11473 |
| 2008 | 16537 |
| 2009 | 15382 |
| 2010 | 9941 |
Average Annual Growth FCF: approx. 8%
CAGR FCF: approx. 4%
Consensus Forecast Industry 5-Year Growth: approx. 12% per yearConsensus Forecast Company 5-Year Growth: approx. 3% per year
Scenario 1
Average FCF 2009-2010 is ~ $12,500 million. Starting at $12,500 million FCF, assuming the company achieves a 5-year growth rate in FCF of 3% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 12500 |
| 1 | 12875 |
| 2 | 13261 |
| 3 | 13659 |
| 4 | 14069 |
| 5 | 14491 |
| Terminal Value | 168680 |
The firm's future cash flows, discounted at a WACC of 8.85%, give a present value for the entire firm (Debt + Equity) of $163,514 million. If the firm's fair value of debt is estimated at $48,000 million, then the fair value of the firm's equity could be $115,514 million. $115,514 million / 8000 million outstanding shares is approximately $15 per share and a 20% margin of safety is $12/share.
Scenario 2
Starting at $12,500 million FCF, assuming the company achieves a 5-year growth rate in FCF of 3% per year, and then 3% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 12500 |
| 1 | 12875 |
| 2 | 13261 |
| 3 | 13659 |
| 4 | 14069 |
| 5 | 14491 |
| Terminal Value | 255205 |
The firm's future cash flows, discounted at a WACC of 8.85%, give a present value for the entire firm (Debt + Equity) of $220,142 million. If the firm's fair value of debt is estimated at $48,000 million, then the fair value of the firm's equity could be $172,142 million. $172,142 million / 8000 million outstanding shares is approximately $22 per share and a 20% margin of safety is $18/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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