Intrinsic value of Inter Pipeline Ltd. - IPL

Previous Close

$24.85

  Intrinsic Value

$1.94

stock screener

  Rating & Target

str. sell

-92%

  Value-price divergence*

+186%

Previous close

$24.85

 
Intrinsic value

$1.94

 
Up/down potential

-92%

 
Rating

str. sell

 
Value-price divergence*

+186%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of IPL stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 9.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  8.89
  39.20
  35.78
  32.70
  29.93
  27.44
  25.19
  23.18
  21.36
  19.72
  18.25
  16.92
  15.73
  14.66
  13.69
  12.82
  12.04
  11.34
  10.70
  10.13
  9.62
  9.16
  8.74
  8.37
  8.03
  7.73
  7.46
  7.21
  6.99
  6.79
  6.61
Revenue, $m
  1,825
  2,540
  3,449
  4,577
  5,947
  7,579
  9,489
  11,688
  14,184
  16,982
  20,081
  23,480
  27,173
  31,157
  35,423
  39,966
  44,778
  49,855
  55,191
  60,784
  66,631
  72,733
  79,092
  85,710
  92,593
  99,749
  107,186
  114,913
  122,944
  131,292
  139,972
Variable operating expenses, $m
 
  1,323
  1,785
  2,357
  3,053
  3,881
  4,851
  5,967
  7,235
  8,655
  10,228
  11,921
  13,796
  15,818
  17,984
  20,291
  22,734
  25,311
  28,021
  30,860
  33,829
  36,927
  40,155
  43,515
  47,010
  50,642
  54,418
  58,341
  62,419
  66,657
  71,063
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,046
  1,323
  1,785
  2,357
  3,053
  3,881
  4,851
  5,967
  7,235
  8,655
  10,228
  11,921
  13,796
  15,818
  17,984
  20,291
  22,734
  25,311
  28,021
  30,860
  33,829
  36,927
  40,155
  43,515
  47,010
  50,642
  54,418
  58,341
  62,419
  66,657
  71,063
Operating income, $m
  779
  1,217
  1,665
  2,220
  2,895
  3,698
  4,638
  5,721
  6,950
  8,327
  9,852
  11,559
  13,378
  15,339
  17,439
  19,675
  22,044
  24,544
  27,171
  29,924
  32,803
  35,807
  38,937
  42,195
  45,584
  49,107
  52,768
  56,572
  60,526
  64,635
  68,908
EBITDA, $m
  1,009
  1,667
  2,264
  3,004
  3,904
  4,975
  6,228
  7,672
  9,310
  11,146
  13,180
  15,411
  17,836
  20,450
  23,251
  26,232
  29,391
  32,723
  36,226
  39,897
  43,735
  47,740
  51,913
  56,257
  60,775
  65,472
  70,353
  75,425
  80,697
  86,176
  91,873
Interest expense (income), $m
  140
  202
  298
  419
  569
  752
  969
  1,223
  1,516
  1,849
  2,221
  2,634
  3,087
  3,579
  4,109
  4,678
  5,283
  5,924
  6,600
  7,311
  8,056
  8,834
  9,647
  10,494
  11,376
  12,292
  13,245
  14,236
  15,265
  16,335
  17,447
Earnings before tax, $m
  629
  1,015
  1,367
  1,801
  2,325
  2,946
  3,669
  4,497
  5,433
  6,478
  7,631
  8,925
  10,291
  11,760
  13,329
  14,998
  16,762
  18,620
  20,571
  22,613
  24,747
  26,972
  29,290
  31,701
  34,208
  36,814
  39,522
  42,336
  45,260
  48,300
  51,461
Tax expense, $m
  151
  274
  369
  486
  628
  795
  991
  1,214
  1,467
  1,749
  2,060
  2,410
  2,778
  3,175
  3,599
  4,049
  4,526
  5,027
  5,554
  6,106
  6,682
  7,283
  7,908
  8,559
  9,236
  9,940
  10,671
  11,431
  12,220
  13,041
  13,895
Net income, $m
  450
  741
  998
  1,315
  1,698
  2,151
  2,678
  3,283
  3,966
  4,729
  5,571
  6,515
  7,512
  8,585
  9,731
  10,948
  12,236
  13,593
  15,017
  16,508
  18,065
  19,690
  21,382
  23,142
  24,972
  26,874
  28,851
  30,905
  33,040
  35,259
  37,567

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  21
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  10,152
  14,113
  19,163
  25,430
  33,041
  42,107
  52,716
  64,934
  78,802
  94,343
  111,561
  130,442
  150,964
  173,093
  196,795
  222,032
  248,768
  276,972
  306,618
  337,688
  370,173
  404,074
  439,398
  476,167
  514,408
  554,162
  595,476
  638,408
  683,024
  729,401
  777,620
Adjusted assets (=assets-cash), $m
  10,131
  14,113
  19,163
  25,430
  33,041
  42,107
  52,716
  64,934
  78,802
  94,343
  111,561
  130,442
  150,964
  173,093
  196,795
  222,032
  248,768
  276,972
  306,618
  337,688
  370,173
  404,074
  439,398
  476,167
  514,408
  554,162
  595,476
  638,408
  683,024
  729,401
  777,620
Revenue / Adjusted assets
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
  0.180
Average production assets, $m
  8,982
  12,504
  16,978
  22,530
  29,273
  37,306
  46,705
  57,529
  69,815
  83,584
  98,838
  115,566
  133,748
  153,354
  174,353
  196,712
  220,399
  245,386
  271,651
  299,178
  327,959
  357,993
  389,289
  421,865
  455,745
  490,965
  527,568
  565,604
  605,132
  646,220
  688,940
Working capital, $m
  -1,813
  -132
  -179
  -238
  -309
  -394
  -493
  -608
  -738
  -883
  -1,044
  -1,221
  -1,413
  -1,620
  -1,842
  -2,078
  -2,328
  -2,592
  -2,870
  -3,161
  -3,465
  -3,782
  -4,113
  -4,457
  -4,815
  -5,187
  -5,574
  -5,975
  -6,393
  -6,827
  -7,279
Total debt, $m
  5,806
  8,510
  11,969
  16,261
  21,475
  27,686
  34,953
  43,321
  52,821
  63,467
  75,261
  88,195
  102,252
  117,411
  133,647
  150,934
  169,248
  188,568
  208,875
  230,158
  252,411
  275,632
  299,830
  325,016
  351,212
  378,443
  406,743
  436,151
  466,714
  498,481
  531,512
Total liabilities, $m
  6,964
  9,668
  13,127
  17,419
  22,633
  28,844
  36,111
  44,479
  53,979
  64,625
  76,419
  89,353
  103,410
  118,569
  134,805
  152,092
  170,406
  189,726
  210,033
  231,316
  253,569
  276,790
  300,988
  326,174
  352,370
  379,601
  407,901
  437,309
  467,872
  499,639
  532,670
Total equity, $m
  3,188
  4,446
  6,036
  8,010
  10,408
  13,264
  16,606
  20,454
  24,823
  29,718
  35,142
  41,089
  47,554
  54,524
  61,991
  69,940
  78,362
  87,246
  96,585
  106,372
  116,605
  127,283
  138,410
  149,993
  162,039
  174,561
  187,575
  201,098
  215,153
  229,761
  244,950
Total liabilities and equity, $m
  10,152
  14,114
  19,163
  25,429
  33,041
  42,108
  52,717
  64,933
  78,802
  94,343
  111,561
  130,442
  150,964
  173,093
  196,796
  222,032
  248,768
  276,972
  306,618
  337,688
  370,174
  404,073
  439,398
  476,167
  514,409
  554,162
  595,476
  638,407
  683,025
  729,400
  777,620
Debt-to-equity ratio
  1.821
  1.910
  1.980
  2.030
  2.060
  2.090
  2.100
  2.120
  2.130
  2.140
  2.140
  2.150
  2.150
  2.150
  2.160
  2.160
  2.160
  2.160
  2.160
  2.160
  2.160
  2.170
  2.170
  2.170
  2.170
  2.170
  2.170
  2.170
  2.170
  2.170
  2.170
Adjusted equity ratio
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315
  0.315

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  450
  741
  998
  1,315
  1,698
  2,151
  2,678
  3,283
  3,966
  4,729
  5,571
  6,515
  7,512
  8,585
  9,731
  10,948
  12,236
  13,593
  15,017
  16,508
  18,065
  19,690
  21,382
  23,142
  24,972
  26,874
  28,851
  30,905
  33,040
  35,259
  37,567
Depreciation, amort., depletion, $m
  230
  450
  599
  784
  1,009
  1,277
  1,590
  1,951
  2,361
  2,820
  3,328
  3,852
  4,458
  5,112
  5,812
  6,557
  7,347
  8,180
  9,055
  9,973
  10,932
  11,933
  12,976
  14,062
  15,192
  16,366
  17,586
  18,853
  20,171
  21,541
  22,965
Funds from operations, $m
  763
  1,191
  1,597
  2,099
  2,707
  3,428
  4,269
  5,234
  6,327
  7,548
  8,899
  10,367
  11,970
  13,696
  15,542
  17,505
  19,583
  21,772
  24,072
  26,480
  28,997
  31,623
  34,358
  37,204
  40,164
  43,240
  46,437
  49,759
  53,211
  56,800
  60,531
Change in working capital, $m
  -43
  -37
  -47
  -59
  -71
  -85
  -99
  -114
  -130
  -145
  -161
  -177
  -192
  -207
  -222
  -236
  -250
  -264
  -277
  -291
  -304
  -317
  -331
  -344
  -358
  -372
  -387
  -402
  -418
  -434
  -451
Cash from operations, $m
  806
  1,228
  1,644
  2,158
  2,778
  3,513
  4,368
  5,348
  6,457
  7,694
  9,060
  10,544
  12,163
  13,904
  15,764
  17,742
  19,833
  22,036
  24,349
  26,771
  29,301
  31,940
  34,689
  37,548
  40,522
  43,612
  46,823
  50,161
  53,629
  57,234
  60,983
Maintenance CAPEX, $m
  0
  -299
  -417
  -566
  -751
  -976
  -1,244
  -1,557
  -1,918
  -2,327
  -2,786
  -3,295
  -3,852
  -4,458
  -5,112
  -5,812
  -6,557
  -7,347
  -8,180
  -9,055
  -9,973
  -10,932
  -11,933
  -12,976
  -14,062
  -15,192
  -16,366
  -17,586
  -18,853
  -20,171
  -21,541
New CAPEX, $m
  -186
  -3,522
  -4,474
  -5,552
  -6,744
  -8,032
  -9,399
  -10,824
  -12,287
  -13,769
  -15,254
  -16,728
  -18,181
  -19,606
  -20,999
  -22,359
  -23,687
  -24,987
  -26,265
  -27,527
  -28,781
  -30,034
  -31,296
  -32,575
  -33,880
  -35,220
  -36,602
  -38,036
  -39,528
  -41,088
  -42,721
Cash from investing activities, $m
  -1,869
  -3,821
  -4,891
  -6,118
  -7,495
  -9,008
  -10,643
  -12,381
  -14,205
  -16,096
  -18,040
  -20,023
  -22,033
  -24,064
  -26,111
  -28,171
  -30,244
  -32,334
  -34,445
  -36,582
  -38,754
  -40,966
  -43,229
  -45,551
  -47,942
  -50,412
  -52,968
  -55,622
  -58,381
  -61,259
  -64,262
Free cash flow, $m
  -1,063
  -2,593
  -3,246
  -3,960
  -4,717
  -5,495
  -6,275
  -7,032
  -7,748
  -8,402
  -8,980
  -9,479
  -9,871
  -10,161
  -10,347
  -10,429
  -10,411
  -10,298
  -10,095
  -9,811
  -9,452
  -9,026
  -8,541
  -8,004
  -7,421
  -6,800
  -6,145
  -5,461
  -4,753
  -4,025
  -3,279
Issuance/(repayment) of debt, $m
  979
  2,725
  3,459
  4,293
  5,214
  6,210
  7,267
  8,369
  9,500
  10,646
  11,794
  12,934
  14,057
  15,159
  16,236
  17,287
  18,314
  19,320
  20,307
  21,283
  22,252
  23,222
  24,197
  25,186
  26,195
  27,231
  28,300
  29,408
  30,562
  31,768
  33,030
Issuance/(repurchase) of shares, $m
  600
  517
  593
  659
  700
  705
  663
  565
  402
  167
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,517
  3,242
  4,052
  4,952
  5,914
  6,915
  7,930
  8,934
  9,902
  10,813
  11,794
  12,934
  14,057
  15,159
  16,236
  17,287
  18,314
  19,320
  20,307
  21,283
  22,252
  23,222
  24,197
  25,186
  26,195
  27,231
  28,300
  29,408
  30,562
  31,768
  33,030
Total cash flow (excl. dividends), $m
  451
  648
  806
  992
  1,197
  1,420
  1,656
  1,902
  2,154
  2,410
  2,814
  3,455
  4,186
  4,998
  5,889
  6,858
  7,903
  9,022
  10,212
  11,472
  12,801
  14,196
  15,657
  17,183
  18,774
  20,432
  22,155
  23,947
  25,809
  27,743
  29,752
Retained Cash Flow (-), $m
  -367
  -1,258
  -1,591
  -1,974
  -2,398
  -2,856
  -3,342
  -3,848
  -4,369
  -4,896
  -5,423
  -5,948
  -6,464
  -6,971
  -7,466
  -7,950
  -8,422
  -8,884
  -9,338
  -9,787
  -10,233
  -10,679
  -11,127
  -11,582
  -12,046
  -12,522
  -13,014
  -13,524
  -14,054
  -14,609
  -15,189
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -609
  -785
  -982
  -1,200
  -1,436
  -1,686
  -1,947
  -2,214
  -2,485
  -2,610
  -2,493
  -2,278
  -1,973
  -1,577
  -1,091
  -519
  138
  874
  1,685
  2,568
  3,517
  4,529
  5,601
  6,728
  7,909
  9,142
  10,424
  11,755
  13,135
  14,563
Discount rate, %
 
  9.80
  10.29
  10.80
  11.34
  11.91
  12.51
  13.13
  13.79
  14.48
  15.20
  15.96
  16.76
  17.60
  18.48
  19.40
  20.37
  21.39
  22.46
  23.58
  24.76
  26.00
  27.30
  28.67
  30.10
  31.61
  33.19
  34.85
  36.59
  38.42
  40.34
PV of cash for distribution, $m
 
  -555
  -645
  -722
  -781
  -818
  -831
  -821
  -788
  -736
  -634
  -489
  -355
  -240
  -147
  -76
  -27
  5
  23
  30
  31
  27
  22
  17
  12
  8
  5
  3
  2
  1
  1
Current shareholders' claim on cash, %
  100
  94.7
  90.4
  87.1
  84.6
  82.6
  81.2
  80.2
  79.7
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5
  79.5

Inter Pipeline Ltd. engages in the petroleum transportation, natural gas liquids extraction, and bulk liquid storage businesses in Canada and Europe. The company operates through four segments: Oil Sands Transportation, Conventional Oil Pipelines, Natural Gas Liquids (NGL) Extraction, and Bulk Liquid Storage. The Oil Sands Transportation segment transports petroleum products, such as bitumen blend and diluent through Cold Lake, Corridor, and Polaris pipeline systems covering approximately 3,300 kilometers of pipeline and 3.8 million barrels of storage capacity. This segment also offers related blending and handling services. The Conventional Oil Pipelines segment is primarily involved in the transportation, storage, and processing of hydrocarbons, as well as provision of midstream marketing blending and handling services. This segment transports crude oil through the Bow River, Central Alberta, and Mid-Saskatchewan pipeline systems covering approximately 3,700 kilometers of pipeline and approximately 986,000 barrels of storage capacity. The NGL Extraction segment processes pipeline natural gas to remove NGL, including ethane, propane, and butanes and pentanes-plus; and fractionates NGL to produce ethane products and propane plus. These NGL are used as energy products; and as a feedstock for the petrochemical and crude oil refining industries. The Bulk Liquid Storage segment stores and handles bulk liquid products. This segment operates 16 terminals and approximately 800 tanks providing approximately 27 million barrels of storage capacity. Inter Pipeline Ltd. was founded in 1997 and is headquartered in Calgary, Canada.

FINANCIAL RATIOS  of  Inter Pipeline Ltd. (IPL)

Valuation Ratios
P/E Ratio 20.3
Price to Sales 5
Price to Book 2.9
Price to Tangible Book
Price to Cash Flow 11.3
Price to Free Cash Flow 14.7
Growth Rates
Sales Growth Rate 8.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -45.6%
Cap. Spend. - 3 Yr. Gr. Rate -37.5%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 127.6%
Total Debt to Equity 182.1%
Interest Coverage 5
Management Effectiveness
Return On Assets 5.8%
Ret/ On Assets - 3 Yr. Avg. 5.7%
Return On Total Capital 5.4%
Ret/ On T. Cap. - 3 Yr. Avg. 5.4%
Return On Equity 15%
Return On Equity - 3 Yr. Avg. 15.1%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 62.8%
Gross Margin - 3 Yr. Avg. 58.6%
EBITDA Margin 54.7%
EBITDA Margin - 3 Yr. Avg. 53.6%
Operating Margin 42.7%
Oper. Margin - 3 Yr. Avg. 41.8%
Pre-Tax Margin 34.5%
Pre-Tax Margin - 3 Yr. Avg. 34.4%
Net Profit Margin 24.7%
Net Profit Margin - 3 Yr. Avg. 23.9%
Effective Tax Rate 24%
Eff/ Tax Rate - 3 Yr. Avg. 25.9%
Payout Ratio 104.4%

IPL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the IPL stock intrinsic value calculation we used $1825 million for the last fiscal year's total revenue generated by Inter Pipeline Ltd.. The default revenue input number comes from 2016 income statement of Inter Pipeline Ltd.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our IPL stock valuation model: a) initial revenue growth rate of 39.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.8%, whose default value for IPL is calculated based on our internal credit rating of Inter Pipeline Ltd., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Inter Pipeline Ltd..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of IPL stock the variable cost ratio is equal to 52.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for IPL stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Inter Pipeline Ltd..

Corporate tax rate of 27% is the nominal tax rate for Inter Pipeline Ltd.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the IPL stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for IPL are equal to 492.2%.

Life of production assets of 40.5 years is the average useful life of capital assets used in Inter Pipeline Ltd. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for IPL is equal to -5.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3188 million for Inter Pipeline Ltd. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 368.087 million for Inter Pipeline Ltd. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Inter Pipeline Ltd. at the current share price and the inputted number of shares is $9.1 billion.

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Stock chart of IPL Financial statements of IPL
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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