Intrinsic value of GlaxoSmithKline ADR - GSK

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$42.67

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$42.67

 
Intrinsic value

$94.43

 
Up/down potential

+121%

 
Rating

str. buy

 
Value-price divergence* premium content

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

We calculate the intrinsic value of GSK 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 103.4

 

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, %
  16.58
  18.50
  17.15
  15.94
  14.84
  13.86
  12.97
  12.17
  11.46
  10.81
  10.23
  9.71
  9.24
  8.81
  8.43
  8.09
  7.78
  7.50
  7.25
  7.03
  6.82
  6.64
  6.48
  6.33
  6.20
  6.08
  5.97
  5.87
  5.79
  5.71
  5.64
Revenue, $m
  33,905
  40,177
  47,068
  54,568
  62,667
  71,351
  80,606
  90,420
  100,779
  111,674
  123,099
  135,048
  147,522
  160,523
  174,057
  188,136
  202,772
  217,983
  233,790
  250,216
  267,290
  285,042
  303,504
  322,715
  342,712
  363,538
  385,238
  407,860
  431,455
  456,076
  481,779
Variable operating expenses, $m
 
  21,280
  24,806
  28,643
  32,786
  37,229
  41,964
  46,985
  52,285
  57,859
  63,704
  69,092
  75,474
  82,125
  89,050
  96,252
  103,740
  111,522
  119,609
  128,013
  136,749
  145,830
  155,276
  165,104
  175,335
  185,990
  197,092
  208,665
  220,737
  233,333
  246,484
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
  30,746
  21,280
  24,806
  28,643
  32,786
  37,229
  41,964
  46,985
  52,285
  57,859
  63,704
  69,092
  75,474
  82,125
  89,050
  96,252
  103,740
  111,522
  119,609
  128,013
  136,749
  145,830
  155,276
  165,104
  175,335
  185,990
  197,092
  208,665
  220,737
  233,333
  246,484
Operating income, $m
  3,158
  18,897
  22,262
  25,925
  29,881
  34,122
  38,642
  43,435
  48,494
  53,815
  59,395
  65,956
  72,048
  78,398
  85,008
  91,883
  99,032
  106,460
  114,180
  122,203
  130,542
  139,211
  148,228
  157,610
  167,377
  177,548
  188,146
  199,194
  210,718
  222,742
  235,296
EBITDA, $m
  5,315
  21,754
  25,485
  29,546
  33,931
  38,633
  43,645
  48,958
  54,568
  60,467
  66,653
  73,123
  79,877
  86,916
  94,245
  101,868
  109,792
  118,029
  126,587
  135,482
  144,726
  154,338
  164,335
  174,736
  185,564
  196,840
  208,590
  220,839
  233,615
  246,946
  260,863
Interest expense (income), $m
  890
  731
  921
  1,414
  1,950
  2,529
  3,150
  3,812
  4,514
  5,255
  6,034
  6,851
  7,705
  8,597
  9,527
  10,495
  11,502
  12,548
  13,636
  14,766
  15,941
  17,162
  18,432
  19,752
  21,126
  22,556
  24,045
  25,597
  27,214
  28,902
  30,662
Earnings before tax, $m
  2,357
  18,166
  21,341
  24,512
  27,931
  31,593
  35,492
  39,623
  43,980
  48,561
  53,361
  59,105
  64,343
  69,800
  75,481
  81,389
  87,530
  93,912
  100,544
  107,437
  114,601
  122,049
  129,797
  137,858
  146,251
  154,992
  164,101
  173,598
  183,503
  193,841
  204,633
Tax expense, $m
  1,066
  4,905
  5,762
  6,618
  7,541
  8,530
  9,583
  10,698
  11,875
  13,111
  14,408
  15,958
  17,373
  18,846
  20,380
  21,975
  23,633
  25,356
  27,147
  29,008
  30,942
  32,953
  35,045
  37,222
  39,488
  41,848
  44,307
  46,871
  49,546
  52,337
  55,251
Net income, $m
  1,109
  13,261
  15,579
  17,893
  20,389
  23,063
  25,909
  28,925
  32,106
  35,449
  38,954
  43,147
  46,970
  50,954
  55,101
  59,414
  63,897
  68,556
  73,397
  78,429
  83,658
  89,096
  94,752
  100,637
  106,763
  113,144
  119,794
  126,726
  133,957
  141,504
  149,382

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,061
  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
  71,825
  77,863
  91,217
  105,752
  121,447
  138,277
  156,213
  175,232
  195,308
  216,423
  238,564
  261,722
  285,895
  311,091
  337,320
  364,604
  392,968
  422,447
  453,081
  484,915
  518,004
  552,407
  588,187
  625,416
  664,170
  704,530
  746,585
  790,426
  836,152
  883,867
  933,681
Adjusted assets (=assets-cash), $m
  65,764
  77,863
  91,217
  105,752
  121,447
  138,277
  156,213
  175,232
  195,308
  216,423
  238,564
  261,722
  285,895
  311,091
  337,320
  364,604
  392,968
  422,447
  453,081
  484,915
  518,004
  552,407
  588,187
  625,416
  664,170
  704,530
  746,585
  790,426
  836,152
  883,867
  933,681
Revenue / Adjusted assets
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
  0.516
Average production assets, $m
  33,994
  40,298
  47,209
  54,732
  62,855
  71,565
  80,848
  90,691
  101,081
  112,009
  123,468
  135,453
  147,965
  161,004
  174,579
  188,700
  203,380
  218,637
  234,491
  250,967
  268,092
  285,897
  304,415
  323,683
  343,740
  364,628
  386,393
  409,083
  432,749
  457,444
  483,225
Working capital, $m
  -2,783
  -4,540
  -5,319
  -6,166
  -7,081
  -8,063
  -9,108
  -10,217
  -11,388
  -12,619
  -13,910
  -15,260
  -16,670
  -18,139
  -19,668
  -21,259
  -22,913
  -24,632
  -26,418
  -28,274
  -30,204
  -32,210
  -34,296
  -36,467
  -38,726
  -41,080
  -43,532
  -46,088
  -48,754
  -51,537
  -54,441
Total debt, $m
  22,843
  22,461
  34,479
  47,561
  61,687
  76,833
  92,976
  110,092
  128,161
  147,165
  167,091
  187,933
  209,690
  232,366
  255,972
  280,528
  306,056
  332,587
  360,157
  388,808
  418,588
  449,550
  481,752
  515,258
  550,137
  586,461
  624,310
  663,767
  704,921
  747,865
  792,697
Total liabilities, $m
  70,458
  70,077
  82,095
  95,177
  109,303
  124,449
  140,592
  157,708
  175,777
  194,781
  214,707
  235,549
  257,306
  279,982
  303,588
  328,144
  353,672
  380,203
  407,773
  436,424
  466,204
  497,166
  529,368
  562,874
  597,753
  634,077
  671,926
  711,383
  752,537
  795,481
  840,313
Total equity, $m
  1,366
  7,786
  9,122
  10,575
  12,145
  13,828
  15,621
  17,523
  19,531
  21,642
  23,856
  26,172
  28,590
  31,109
  33,732
  36,460
  39,297
  42,245
  45,308
  48,492
  51,800
  55,241
  58,819
  62,542
  66,417
  70,453
  74,658
  79,043
  83,615
  88,387
  93,368
Total liabilities and equity, $m
  71,824
  77,863
  91,217
  105,752
  121,448
  138,277
  156,213
  175,231
  195,308
  216,423
  238,563
  261,721
  285,896
  311,091
  337,320
  364,604
  392,969
  422,448
  453,081
  484,916
  518,004
  552,407
  588,187
  625,416
  664,170
  704,530
  746,584
  790,426
  836,152
  883,868
  933,681
Debt-to-equity ratio
  16.723
  2.880
  3.780
  4.500
  5.080
  5.560
  5.950
  6.280
  6.560
  6.800
  7.000
  7.180
  7.330
  7.470
  7.590
  7.690
  7.790
  7.870
  7.950
  8.020
  8.080
  8.140
  8.190
  8.240
  8.280
  8.320
  8.360
  8.400
  8.430
  8.460
  8.490
Adjusted equity ratio
  -0.045
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,109
  13,261
  15,579
  17,893
  20,389
  23,063
  25,909
  28,925
  32,106
  35,449
  38,954
  43,147
  46,970
  50,954
  55,101
  59,414
  63,897
  68,556
  73,397
  78,429
  83,658
  89,096
  94,752
  100,637
  106,763
  113,144
  119,794
  126,726
  133,957
  141,504
  149,382
Depreciation, amort., depletion, $m
  2,157
  2,857
  3,223
  3,621
  4,051
  4,512
  5,003
  5,524
  6,073
  6,652
  7,258
  7,167
  7,829
  8,519
  9,237
  9,984
  10,761
  11,568
  12,407
  13,279
  14,185
  15,127
  16,107
  17,126
  18,187
  19,292
  20,444
  21,645
  22,897
  24,203
  25,567
Funds from operations, $m
  10,354
  16,119
  18,802
  21,515
  24,440
  27,574
  30,912
  34,448
  38,179
  42,101
  46,212
  50,314
  54,799
  59,473
  64,338
  69,398
  74,658
  80,124
  85,804
  91,707
  97,843
  104,223
  110,858
  117,763
  124,951
  132,437
  140,238
  148,371
  156,854
  165,707
  174,950
Change in working capital, $m
  2,456
  -709
  -779
  -848
  -915
  -981
  -1,046
  -1,109
  -1,171
  -1,231
  -1,291
  -1,350
  -1,410
  -1,469
  -1,529
  -1,591
  -1,654
  -1,719
  -1,786
  -1,856
  -1,929
  -2,006
  -2,086
  -2,171
  -2,260
  -2,353
  -2,452
  -2,556
  -2,666
  -2,782
  -2,905
Cash from operations, $m
  7,898
  18,800
  19,581
  22,362
  25,355
  28,556
  31,958
  35,557
  39,350
  43,332
  47,503
  51,664
  56,209
  60,942
  65,867
  70,989
  76,312
  81,843
  87,590
  93,564
  99,773
  106,229
  112,944
  119,933
  127,210
  134,790
  142,690
  150,927
  159,520
  168,489
  177,854
Maintenance CAPEX, $m
  0
  -1,799
  -2,132
  -2,498
  -2,896
  -3,326
  -3,787
  -4,278
  -4,798
  -5,348
  -5,926
  -6,533
  -7,167
  -7,829
  -8,519
  -9,237
  -9,984
  -10,761
  -11,568
  -12,407
  -13,279
  -14,185
  -15,127
  -16,107
  -17,126
  -18,187
  -19,292
  -20,444
  -21,645
  -22,897
  -24,203
New CAPEX, $m
  -2,859
  -6,304
  -6,911
  -7,523
  -8,123
  -8,710
  -9,283
  -9,843
  -10,390
  -10,928
  -11,459
  -11,985
  -12,511
  -13,040
  -13,575
  -14,121
  -14,680
  -15,257
  -15,854
  -16,476
  -17,125
  -17,805
  -18,518
  -19,268
  -20,057
  -20,889
  -21,765
  -22,690
  -23,666
  -24,695
  -25,781
Cash from investing activities, $m
  -1,543
  -8,103
  -9,043
  -10,021
  -11,019
  -12,036
  -13,070
  -14,121
  -15,188
  -16,276
  -17,385
  -18,518
  -19,678
  -20,869
  -22,094
  -23,358
  -24,664
  -26,018
  -27,422
  -28,883
  -30,404
  -31,990
  -33,645
  -35,375
  -37,183
  -39,076
  -41,057
  -43,134
  -45,311
  -47,592
  -49,984
Free cash flow, $m
  6,355
  10,697
  10,538
  12,341
  14,336
  16,520
  18,888
  21,437
  24,161
  27,056
  30,117
  33,146
  36,531
  40,073
  43,773
  47,631
  51,647
  55,825
  60,168
  64,681
  69,369
  74,239
  79,300
  84,559
  90,027
  95,714
  101,632
  107,793
  114,210
  120,898
  127,870
Issuance/(repayment) of debt, $m
  158
  4,638
  12,018
  13,082
  14,126
  15,146
  16,143
  17,116
  18,069
  19,004
  19,926
  20,842
  21,756
  22,676
  23,607
  24,555
  25,528
  26,531
  27,570
  28,651
  29,780
  30,962
  32,202
  33,506
  34,878
  36,325
  37,849
  39,457
  41,154
  42,944
  44,832
Issuance/(repurchase) of shares, $m
  108
  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 from financing (excl. dividends), $m  
  -1,875
  4,638
  12,018
  13,082
  14,126
  15,146
  16,143
  17,116
  18,069
  19,004
  19,926
  20,842
  21,756
  22,676
  23,607
  24,555
  25,528
  26,531
  27,570
  28,651
  29,780
  30,962
  32,202
  33,506
  34,878
  36,325
  37,849
  39,457
  41,154
  42,944
  44,832
Total cash flow (excl. dividends), $m
  4,825
  15,335
  22,556
  25,423
  28,462
  31,666
  35,031
  38,553
  42,229
  46,060
  50,044
  53,988
  58,287
  62,749
  67,380
  72,186
  77,175
  82,356
  87,738
  93,332
  99,149
  105,201
  111,502
  118,065
  124,906
  132,039
  139,481
  147,250
  155,364
  163,841
  172,702
Retained Cash Flow (-), $m
  4,851
  -7,461
  -1,335
  -1,454
  -1,570
  -1,683
  -1,794
  -1,902
  -2,008
  -2,112
  -2,214
  -2,316
  -2,417
  -2,520
  -2,623
  -2,728
  -2,836
  -2,948
  -3,063
  -3,183
  -3,309
  -3,440
  -3,578
  -3,723
  -3,875
  -4,036
  -4,205
  -4,384
  -4,573
  -4,772
  -4,981
Prev. year cash balance distribution, $m
 
  1,041
  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
 
  8,915
  21,220
  23,970
  26,893
  29,983
  33,238
  36,651
  40,222
  43,948
  47,830
  51,672
  55,870
  60,230
  64,757
  69,458
  74,339
  79,408
  84,675
  90,148
  95,840
  101,761
  107,924
  114,342
  121,030
  128,003
  135,276
  142,866
  150,791
  159,070
  167,721
Discount rate, %
 
  8.60
  9.03
  9.48
  9.96
  10.45
  10.98
  11.52
  12.10
  12.71
  13.34
  14.01
  14.71
  15.44
  16.22
  17.03
  17.88
  18.77
  19.71
  20.70
  21.73
  22.82
  23.96
  25.16
  26.42
  27.74
  29.12
  30.58
  32.11
  33.71
  35.40
PV of cash for distribution, $m
 
  8,209
  17,851
  18,266
  18,398
  18,238
  17,793
  17,080
  16,128
  14,977
  13,671
  12,217
  10,765
  9,310
  7,898
  6,568
  5,349
  4,263
  3,321
  2,528
  1,877
  1,358
  957
  656
  436
  281
  176
  106
  62
  35
  19
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

GlaxoSmithKline plc creates, discovers, develops, manufactures, and markets pharmaceutical products, including vaccines, over-the-counter medicines, and health-related consumer products worldwide. The company operates through five segments: Global Pharmaceuticals, HIV, Pharmaceuticals R&D, Vaccines, and Consumer Healthcare. It offers pharmaceutical products in the therapeutic areas, including respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, anti-bacterials, and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV. The company also provides consumer healthcare products in wellness, oral health, nutrition, and skin health areas under the Sensodyne, Horlicks, Parodontax, Poligrip, Voltaren, Panadol, Otrivin, Tums, Flonase, Eno, and Theraflu brand names. GlaxoSmithKline plc offers its consumer healthcare products in the form of tablets, caplets, infant syrup drops, topical gels, nasal sprays, effervescents, lozenges, gum and trans-dermal patches, malted drinks and foods, and creams. The company has a strategic collaboration with Miltenyi Biotec GmbH to develop a cell and gene therapy automation and processing technology; and a partnership with Fimbrion Therapeutics for the development of a small molecule drug to treat prevent urinary tract infections. GlaxoSmithKline plc was founded in 1935 and is headquartered in Brentford, the United Kingdom.

FINANCIAL RATIOS  of  GlaxoSmithKline ADR (GSK)

Valuation Ratios
P/E Ratio 188.9
Price to Sales 6.2
Price to Book 153.4
Price to Tangible Book
Price to Cash Flow 26.5
Price to Free Cash Flow 41.6
Growth Rates
Sales Growth Rate 16.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 23.7%
Cap. Spend. - 3 Yr. Gr. Rate 6.7%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 1304.8%
Total Debt to Equity 1672.3%
Interest Coverage 4
Management Effectiveness
Return On Assets 2.3%
Ret/ On Assets - 3 Yr. Avg. 9.9%
Return On Total Capital 4.4%
Ret/ On T. Cap. - 3 Yr. Avg. 17.8%
Return On Equity 29.2%
Return On Equity - 3 Yr. Avg. 85.9%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 68.1%
Gross Margin - 3 Yr. Avg. 68%
EBITDA Margin 15.9%
EBITDA Margin - 3 Yr. Avg. 30.8%
Operating Margin 9.3%
Oper. Margin - 3 Yr. Avg. 23.9%
Pre-Tax Margin 7%
Pre-Tax Margin - 3 Yr. Avg. 21.3%
Net Profit Margin 3.3%
Net Profit Margin - 3 Yr. Avg. 16.8%
Effective Tax Rate 45.2%
Eff/ Tax Rate - 3 Yr. Avg. 23.4%
Payout Ratio 531.7%

GSK stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the GSK stock intrinsic value calculation we used $33905 million for the last fiscal year's total revenue generated by GlaxoSmithKline ADR. The default revenue input number comes from 2016 income statement of GlaxoSmithKline ADR. 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 GSK stock valuation model: a) initial revenue growth rate of 18.5% 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 8.6%, whose default value for GSK is calculated based on our internal credit rating of GlaxoSmithKline ADR, 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 GlaxoSmithKline ADR.
    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 GSK stock the variable cost ratio is equal to 53.3%.

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 GSK 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 4.1% for GlaxoSmithKline ADR.

Corporate tax rate of 27% is the nominal tax rate for GlaxoSmithKline ADR. 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 GSK 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 GSK are equal to 100.3%.

Life of production assets of 18.9 years is the average useful life of capital assets used in GlaxoSmithKline ADR 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 GSK is equal to -11.3%. 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 - $1366 million for GlaxoSmithKline ADR - 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 2423.07 million for GlaxoSmithKline ADR 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 GlaxoSmithKline ADR at the current share price and the inputted number of shares is $103.4 billion.


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Stock chart of GSK Financial statements of GSK Annual reports of GSK
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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