In this article, we will assess the intrinsic value of Philip Morris International Inc. (NYSE:PM) using the 2-stage Free Cash Flow to Equity model. Our estimated fair value for the company is $164, which suggests that the current share price of $91.41 is potentially undervalued by 44%.
The Discounted Cash Flow (DCF) model is used to estimate the intrinsic value of a company by projecting its future cash flows and discounting them back to their present value. This model assumes that a dollar today is more valuable than a dollar in the future.
Philip Morris International’s cash flows are forecasted for the next 10 years. We use analyst estimates or extrapolate previous free cash flows when analyst estimates are not available. We assume that companies with shrinking free cash flows will slow their rate of shrinkage, while companies with growing free cash flows will see their growth rate slow over time.
The first stage of the model represents the higher growth phase, while the second stage represents a lower growth phase. The cash flows from both stages are discounted to their present values using a discount rate of 6.6%.
The terminal value, representing the cash flows after the first stage, is estimated using a conservative growth rate that cannot exceed a country’s GDP growth. In this case, we use the 5-year average of the 10-year government bond yield as the growth rate.
By summing up the present values of the cash flows from both stages and the terminal value, we arrive at the Total Equity Value of $255 billion. Dividing this value by the total number of shares outstanding gives us the intrinsic value per share.
Comparing this intrinsic value per share with the current share price, we find that Philip Morris International is potentially undervalued by 44%. However, it is important to note that the DCF model is just an approximate valuation and should not be the sole metric for making investment decisions.
It is recommended to evaluate other factors and perform further research before making any investment decisions. Assessing risks, analyzing future earnings growth, and exploring alternative investment options are crucial steps for informed investment decisions.
In conclusion, our analysis indicates that Philip Morris International Inc. may be undervalued. However, investors should conduct their own evaluation of the company and consider other factors before making any investment decisions.
Definitions:
– Intrinsic value: The estimated true value of a company’s stock based on its fundamentals, such as future cash flows and growth prospects.
– Discounted cash flow (DCF): A valuation method that estimates the intrinsic value of a company by projecting its future cash flows and discounting them back to their present value.
– Free cash flow (FCF): The amount of cash generated by a company’s operations after deducting capital expenditures.
– Terminal value: The value of a company’s cash flows beyond a specified projection period, typically estimated using a long-term growth rate.
– Discount rate: The rate used to discount future cash flows back to their present value, reflecting the time value of money.
– Equity value: The value of a company’s ownership interest, calculated by subtracting its liabilities from its assets.
Sources:
– Simply Wall St analysis model: [URL]
– Government bond yield: [source]
SWOT Analysis for Philip Morris International:
– Strengths: [list of strengths]
– Weaknesses: [list of weaknesses]
– Opportunities: [list of opportunities]
– Threats: [list of threats]
Risks:
– [description of risks specific to Philip Morris International]
Future Earnings:
– [comparison of PM’s growth rate to peers and the market]
Other High-Quality Alternatives:
– [interactive list of high-quality stocks for consideration]
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