Intrinsic value of Principal Financial Group - PFG

Previous Close

$74.05

  Intrinsic Value

$2,605

stock screener

  Rating & Target

str. buy

+999%

Previous close

$74.05

 
Intrinsic value

$2,605

 
Up/down potential

+999%

 
Rating

str. buy

Our model is not good at valuating stocks of financial companies, such as PFG.

We calculate the intrinsic value of PFG 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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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, %
  4.15
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  0
  19,989
  30,883
  46,185
  67,012
  94,545
  129,977
  174,467
  229,086
  294,778
  372,329
  462,348
  565,265
  681,335
  810,654
  953,185
  1,108,783
  1,277,225
  1,458,239
  1,651,531
  1,856,811
  2,073,811
  2,302,305
  2,542,118
  2,793,143
  3,055,340
  3,328,745
  3,613,472
  3,909,713
  4,217,736
  4,537,887
Variable operating expenses, $m
 
  13,471
  20,757
  30,992
  44,922
  63,336
  87,034
  116,790
  153,321
  197,258
  249,126
  309,231
  378,065
  455,695
  542,187
  637,516
  741,584
  854,243
  975,310
  1,104,589
  1,241,886
  1,387,022
  1,539,845
  1,700,239
  1,868,131
  2,043,495
  2,226,356
  2,416,789
  2,614,923
  2,820,938
  3,035,063
Fixed operating expenses, $m
 
  2,571
  2,635
  2,701
  2,768
  2,838
  2,909
  2,981
  3,056
  3,132
  3,210
  3,291
  3,373
  3,457
  3,544
  3,632
  3,723
  3,816
  3,912
  4,009
  4,110
  4,212
  4,318
  4,426
  4,536
  4,650
  4,766
  4,885
  5,007
  5,132
  5,261
Total operating expenses, $m
  10,901
  16,042
  23,392
  33,693
  47,690
  66,174
  89,943
  119,771
  156,377
  200,390
  252,336
  312,522
  381,438
  459,152
  545,731
  641,148
  745,307
  858,059
  979,222
  1,108,598
  1,245,996
  1,391,234
  1,544,163
  1,704,665
  1,872,667
  2,048,145
  2,231,122
  2,421,674
  2,619,930
  2,826,070
  3,040,324
Operating income, $m
  1,592
  3,947
  7,490
  12,492
  19,322
  28,371
  40,034
  54,695
  72,709
  94,388
  119,993
  149,826
  183,827
  222,182
  264,923
  312,036
  363,475
  419,166
  479,017
  542,932
  610,815
  682,577
  758,143
  837,454
  920,476
  1,007,195
  1,097,623
  1,191,798
  1,289,783
  1,391,666
  1,497,563
EBITDA, $m
  2,064
  4,477
  8,253
  13,583
  20,858
  30,496
  42,918
  58,531
  77,714
  100,799
  128,063
  159,721
  195,924
  236,763
  282,270
  332,434
  387,203
  446,498
  510,223
  578,275
  650,551
  726,957
  807,412
  891,856
  980,249
  1,072,579
  1,168,858
  1,269,126
  1,373,450
  1,481,926
  1,594,674
Interest expense (income), $m
  162
  156
  5,511
  14,246
  26,516
  43,216
  65,292
  93,702
  129,375
  173,170
  225,843
  288,024
  360,203
  442,724
  535,791
  639,481
  753,765
  878,526
  1,013,586
  1,158,726
  1,313,712
  1,478,309
  1,652,304
  1,835,514
  2,027,801
  2,229,077
  2,439,311
  2,658,532
  2,886,832
  3,124,363
  3,371,342
Earnings before tax, $m
  1,592
  3,791
  1,979
  -1,754
  -7,194
  -14,845
  -25,257
  -39,007
  -56,666
  -78,781
  -105,850
  -138,198
  -176,376
  -220,542
  -270,868
  -327,445
  -390,290
  -459,361
  -534,569
  -615,794
  -702,896
  -795,732
  -894,161
  -998,060
  -1,107,325
  -1,221,882
  -1,341,688
  -1,466,734
  -1,597,049
  -1,732,697
  -1,873,779
Tax expense, $m
  230
  1,024
  534
  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
Net income, $m
  1,317
  2,768
  1,445
  -1,754
  -7,194
  -14,845
  -25,257
  -39,007
  -56,666
  -78,781
  -105,850
  -138,198
  -176,376
  -220,542
  -270,868
  -327,445
  -390,290
  -459,361
  -534,569
  -615,794
  -702,896
  -795,732
  -894,161
  -998,060
  -1,107,325
  -1,221,882
  -1,341,688
  -1,466,734
  -1,597,049
  -1,732,697
  -1,873,779

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
  0
Total assets, $m
  228,014
  363,433
  561,504
  839,729
  1,218,404
  1,718,992
  2,363,217
  3,172,129
  4,165,206
  5,359,608
  6,769,620
  8,406,333
  10,277,547
  12,387,900
  14,739,156
  17,330,630
  20,159,684
  23,222,264
  26,513,428
  30,027,837
  33,760,203
  37,705,662
  41,860,088
  46,220,336
  50,784,416
  55,551,628
  60,522,631
  65,699,492
  71,085,691
  76,686,115
  82,507,029
Adjusted assets (=assets-cash), $m
  228,014
  363,433
  561,504
  839,729
  1,218,404
  1,718,992
  2,363,217
  3,172,129
  4,165,206
  5,359,608
  6,769,620
  8,406,333
  10,277,547
  12,387,900
  14,739,156
  17,330,630
  20,159,684
  23,222,264
  26,513,428
  30,027,837
  33,760,203
  37,705,662
  41,860,088
  46,220,336
  50,784,416
  55,551,628
  60,522,631
  65,699,492
  71,085,691
  76,686,115
  82,507,029
Revenue / Adjusted assets
  0.000
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
  0.055
Average production assets, $m
  1,342
  2,139
  3,304
  4,942
  7,170
  10,116
  13,908
  18,668
  24,512
  31,541
  39,839
  49,471
  60,483
  72,903
  86,740
  101,991
  118,640
  136,663
  156,032
  176,714
  198,679
  221,898
  246,347
  272,007
  298,866
  326,921
  356,176
  386,642
  418,339
  451,298
  485,554
Working capital, $m
  0
  80
  124
  185
  268
  378
  520
  698
  916
  1,179
  1,489
  1,849
  2,261
  2,725
  3,243
  3,813
  4,435
  5,109
  5,833
  6,606
  7,427
  8,295
  9,209
  10,168
  11,173
  12,221
  13,315
  14,454
  15,639
  16,871
  18,152
Total debt, $m
  3,177
  112,479
  290,743
  541,146
  881,954
  1,332,482
  1,912,286
  2,640,306
  3,534,075
  4,609,037
  5,878,048
  7,351,089
  9,035,183
  10,934,500
  13,050,631
  15,382,957
  17,929,105
  20,685,428
  23,647,475
  26,810,444
  30,169,572
  33,720,486
  37,459,470
  41,383,692
  45,491,365
  49,781,855
  54,255,758
  58,914,933
  63,762,512
  68,802,893
  74,041,716
Total liabilities, $m
  217,787
  327,089
  505,353
  755,756
  1,096,564
  1,547,092
  2,126,896
  2,854,916
  3,748,685
  4,823,647
  6,092,658
  7,565,699
  9,249,793
  11,149,110
  13,265,241
  15,597,567
  18,143,715
  20,900,038
  23,862,085
  27,025,054
  30,384,182
  33,935,096
  37,674,080
  41,598,302
  45,705,975
  49,996,465
  54,470,368
  59,129,543
  63,977,122
  69,017,503
  74,256,326
Total equity, $m
  10,227
  36,343
  56,150
  83,973
  121,840
  171,899
  236,322
  317,213
  416,521
  535,961
  676,962
  840,633
  1,027,755
  1,238,790
  1,473,916
  1,733,063
  2,015,968
  2,322,226
  2,651,343
  3,002,784
  3,376,020
  3,770,566
  4,186,009
  4,622,034
  5,078,442
  5,555,163
  6,052,263
  6,569,949
  7,108,569
  7,668,611
  8,250,703
Total liabilities and equity, $m
  228,014
  363,432
  561,503
  839,729
  1,218,404
  1,718,991
  2,363,218
  3,172,129
  4,165,206
  5,359,608
  6,769,620
  8,406,332
  10,277,548
  12,387,900
  14,739,157
  17,330,630
  20,159,683
  23,222,264
  26,513,428
  30,027,838
  33,760,202
  37,705,662
  41,860,089
  46,220,336
  50,784,417
  55,551,628
  60,522,631
  65,699,492
  71,085,691
  76,686,114
  82,507,029
Debt-to-equity ratio
  0.311
  3.090
  5.180
  6.440
  7.240
  7.750
  8.090
  8.320
  8.480
  8.600
  8.680
  8.740
  8.790
  8.830
  8.850
  8.880
  8.890
  8.910
  8.920
  8.930
  8.940
  8.940
  8.950
  8.950
  8.960
  8.960
  8.960
  8.970
  8.970
  8.970
  8.970
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
  1,317
  2,768
  1,445
  -1,754
  -7,194
  -14,845
  -25,257
  -39,007
  -56,666
  -78,781
  -105,850
  -138,198
  -176,376
  -220,542
  -270,868
  -327,445
  -390,290
  -459,361
  -534,569
  -615,794
  -702,896
  -795,732
  -894,161
  -998,060
  -1,107,325
  -1,221,882
  -1,341,688
  -1,466,734
  -1,597,049
  -1,732,697
  -1,873,779
Depreciation, amort., depletion, $m
  472
  530
  763
  1,090
  1,536
  2,125
  2,884
  3,836
  5,005
  6,410
  8,070
  9,894
  12,097
  14,581
  17,348
  20,398
  23,728
  27,333
  31,206
  35,343
  39,736
  44,380
  49,269
  54,401
  59,773
  65,384
  71,235
  77,328
  83,668
  90,260
  97,111
Funds from operations, $m
  5,655
  3,297
  2,208
  -664
  -5,658
  -12,719
  -22,374
  -35,171
  -51,661
  -72,371
  -97,780
  -128,304
  -164,279
  -205,961
  -253,520
  -307,046
  -366,562
  -432,028
  -503,363
  -580,451
  -663,161
  -751,352
  -844,892
  -943,658
  -1,047,552
  -1,156,498
  -1,270,453
  -1,389,406
  -1,513,381
  -1,642,437
  -1,776,668
Change in working capital, $m
  1,797
  30
  44
  61
  83
  110
  142
  178
  218
  263
  310
  360
  412
  464
  517
  570
  622
  674
  724
  773
  821
  868
  914
  959
  1,004
  1,049
  1,094
  1,139
  1,185
  1,232
  1,281
Cash from operations, $m
  3,858
  3,268
  2,164
  -725
  -5,741
  -12,830
  -22,516
  -35,349
  -51,880
  -72,634
  -98,090
  -128,664
  -164,691
  -206,426
  -254,037
  -307,617
  -367,184
  -432,702
  -504,087
  -581,224
  -663,982
  -752,220
  -845,806
  -944,618
  -1,048,556
  -1,157,546
  -1,271,546
  -1,390,545
  -1,514,566
  -1,643,669
  -1,777,949
Maintenance CAPEX, $m
  0
  -268
  -428
  -661
  -988
  -1,434
  -2,023
  -2,782
  -3,734
  -4,902
  -6,308
  -7,968
  -9,894
  -12,097
  -14,581
  -17,348
  -20,398
  -23,728
  -27,333
  -31,206
  -35,343
  -39,736
  -44,380
  -49,269
  -54,401
  -59,773
  -65,384
  -71,235
  -77,328
  -83,668
  -90,260
New CAPEX, $m
  -155
  -797
  -1,166
  -1,637
  -2,229
  -2,946
  -3,791
  -4,760
  -5,844
  -7,029
  -8,298
  -9,632
  -11,012
  -12,419
  -13,837
  -15,251
  -16,649
  -18,023
  -19,368
  -20,682
  -21,965
  -23,219
  -24,449
  -25,660
  -26,860
  -28,055
  -29,254
  -30,466
  -31,698
  -32,958
  -34,256
Cash from investing activities, $m
  -5,154
  -1,065
  -1,594
  -2,298
  -3,217
  -4,380
  -5,814
  -7,542
  -9,578
  -11,931
  -14,606
  -17,600
  -20,906
  -24,516
  -28,418
  -32,599
  -37,047
  -41,751
  -46,701
  -51,888
  -57,308
  -62,955
  -68,829
  -74,929
  -81,261
  -87,828
  -94,638
  -101,701
  -109,026
  -116,626
  -124,516
Free cash flow, $m
  -1,296
  2,202
  571
  -3,023
  -8,958
  -17,210
  -28,330
  -42,891
  -61,458
  -84,565
  -112,697
  -146,264
  -185,597
  -230,942
  -282,455
  -340,215
  -404,231
  -474,453
  -550,788
  -633,113
  -721,290
  -815,175
  -914,634
  -1,019,547
  -1,129,817
  -1,245,375
  -1,366,185
  -1,492,246
  -1,623,592
  -1,760,296
  -1,902,464
Issuance/(repayment) of debt, $m
  -275
  109,302
  178,264
  250,403
  340,808
  450,529
  579,803
  728,020
  893,769
  1,074,962
  1,269,011
  1,473,041
  1,684,093
  1,899,318
  2,116,130
  2,332,326
  2,546,149
  2,756,323
  2,962,047
  3,162,968
  3,359,129
  3,550,913
  3,738,984
  3,924,223
  4,107,673
  4,290,490
  4,473,903
  4,659,175
  4,847,579
  5,040,381
  5,238,822
Issuance/(repurchase) of shares, $m
  -240
  23,349
  18,362
  29,577
  45,062
  64,904
  89,680
  119,898
  155,973
  198,222
  246,851
  301,869
  363,498
  431,577
  505,994
  586,592
  673,195
  765,619
  863,685
  967,235
  1,076,133
  1,190,278
  1,309,604
  1,434,084
  1,563,733
  1,698,603
  1,838,788
  1,984,420
  2,135,669
  2,292,739
  2,455,870
Cash from financing (excl. dividends), $m  
  1,916
  132,651
  196,626
  279,980
  385,870
  515,433
  669,483
  847,918
  1,049,742
  1,273,184
  1,515,862
  1,774,910
  2,047,591
  2,330,895
  2,622,124
  2,918,918
  3,219,344
  3,521,942
  3,825,732
  4,130,203
  4,435,262
  4,741,191
  5,048,588
  5,358,307
  5,671,406
  5,989,093
  6,312,691
  6,643,595
  6,983,248
  7,333,120
  7,694,692
Total cash flow (excl. dividends), $m
  620
  134,853
  197,197
  276,956
  376,912
  498,223
  641,153
  805,027
  988,285
  1,188,618
  1,403,166
  1,628,647
  1,861,993
  2,099,953
  2,339,669
  2,578,702
  2,815,113
  3,047,488
  3,274,945
  3,497,090
  3,713,972
  3,926,016
  4,133,954
  4,338,760
  4,541,589
  4,743,719
  4,946,506
  5,151,349
  5,359,656
  5,572,825
  5,792,228
Retained Cash Flow (-), $m
  -915
  -26,116
  -19,807
  -29,577
  -45,062
  -64,904
  -89,680
  -119,898
  -155,973
  -198,222
  -246,851
  -301,869
  -363,498
  -431,577
  -505,994
  -586,592
  -673,195
  -765,619
  -863,685
  -967,235
  -1,076,133
  -1,190,278
  -1,309,604
  -1,434,084
  -1,563,733
  -1,698,603
  -1,838,788
  -1,984,420
  -2,135,669
  -2,292,739
  -2,455,870
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
 
  108,737
  177,390
  247,379
  331,850
  433,319
  551,473
  685,130
  832,312
  990,396
  1,156,315
  1,326,777
  1,498,496
  1,668,376
  1,833,675
  1,992,110
  2,141,917
  2,281,870
  2,411,260
  2,529,855
  2,637,839
  2,735,738
  2,824,350
  2,904,675
  2,977,856
  3,045,116
  3,107,718
  3,166,929
  3,223,987
  3,280,085
  3,336,358
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  104,254
  162,394
  215,286
  273,245
  335,876
  400,226
  462,864
  520,216
  568,930
  606,211
  630,067
  639,462
  634,347
  615,597
  584,850
  544,307
  496,497
  444,057
  389,526
  335,189
  282,966
  234,347
  190,376
  151,668
  118,459
  90,668
  67,971
  49,880
  35,805
  25,122
Current shareholders' claim on cash, %
  100
  48.1
  38.8
  31.1
  24.8
  19.8
  15.9
  12.8
  10.4
  8.5
  7.0
  5.8
  4.8
  4.0
  3.3
  2.8
  2.4
  2.0
  1.7
  1.5
  1.2
  1.1
  0.9
  0.8
  0.7
  0.6
  0.5
  0.4
  0.4
  0.3
  0.3

Principal Financial Group, Inc. is an investment management company. The Company offers a range of financial products and services, including retirement, asset management and insurance. Its segments include Retirement and Income Solutions; Principal Global Investors, Principal International; U.S. Insurance Solutions, and Corporate. The Company offers a portfolio of products and services for retirement savings and retirement income. The Company's Principal Global Investors segment manages assets for investors around the world. The Company offers pension accumulation products and services, mutual funds, asset management, income annuities and life insurance accumulation products. The Company's U.S. Insurance Solutions segment provides group and individual insurance solutions. It focuses on small and medium-sized businesses, providing a range of retirement and employee benefit solutions, and individual insurance solutions to meet the needs of the business owners and their employees.

FINANCIAL RATIOS  of  Principal Financial Group (PFG)

Valuation Ratios
P/E Ratio 16.2
Price to Sales 1.7
Price to Book 2.1
Price to Tangible Book
Price to Cash Flow 5.5
Price to Free Cash Flow 5.8
Growth Rates
Sales Growth Rate 4.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 14%
Cap. Spend. - 3 Yr. Gr. Rate 21.3%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 30.6%
Total Debt to Equity 31.1%
Interest Coverage 11
Management Effectiveness
Return On Assets 0.7%
Ret/ On Assets - 3 Yr. Avg. 0.6%
Return On Total Capital 10.1%
Ret/ On T. Cap. - 3 Yr. Avg. 9.6%
Return On Equity 13.5%
Return On Equity - 3 Yr. Avg. 12.6%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 17.8%
EBITDA Margin - 3 Yr. Avg. 18.5%
Operating Margin 12.7%
Oper. Margin - 3 Yr. Avg. 12.9%
Pre-Tax Margin 12.7%
Pre-Tax Margin - 3 Yr. Avg. 12.9%
Net Profit Margin 10.5%
Net Profit Margin - 3 Yr. Avg. 10.6%
Effective Tax Rate 14.4%
Eff/ Tax Rate - 3 Yr. Avg. 16.1%
Payout Ratio 35.3%

PFG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PFG stock intrinsic value calculation we used $12493 million for the last fiscal year's total revenue generated by Principal Financial Group. The default revenue input number comes from 2016 income statement of Principal Financial Group. 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 PFG stock valuation model: a) initial revenue growth rate of 60% 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 4.3%, whose default value for PFG is calculated based on our internal credit rating of Principal Financial Group, 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 Principal Financial Group.
    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 PFG stock the variable cost ratio is equal to 67.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $2508 million in the base year in the intrinsic value calculation for PFG 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 4.9% for Principal Financial Group.

Corporate tax rate of 27% is the nominal tax rate for Principal Financial Group. 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 PFG 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 PFG are equal to 10.7%.

Life of production assets of 5 years is the average useful life of capital assets used in Principal Financial Group 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 PFG is equal to 0.4%. 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 - $10227 million for Principal Financial Group - 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 292.092 million for Principal Financial Group 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 Principal Financial Group at the current share price and the inputted number of shares is $21.6 billion.

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▶ NYSE Top Financial Dividend Paying Stocks   [Nov-09-17 12:02PM  Simply Wall St.]
▶ Principal┬« to Host 2018 Outlook Call on Dec. 12, 2017   [Nov-08-17 04:15PM  Business Wire]
▶ [$$] Blackstone Buys Logistics Portfolio for $500 Million   [Oct-31-17 04:22PM  The Wall Street Journal]
▶ Principal Financial misses 3Q profit forecasts   [Oct-26-17 04:59PM  Associated Press]
▶ Principal to Acquire MetLife Afore in Mexico   [08:30AM  Business Wire]
▶ Principal Names Diane Nordin to Board of Directors   [Oct-25-17 04:30PM  Business Wire]
▶ Lawmakers clash over big changes to Obamacare   [Oct-16-17 11:46AM  Yahoo Finance Video]
▶ Principal Launches U.S. Mega-Cap Multi-Factor Index ETF   [Oct-12-17 06:17PM  Business Wire]
▶ Principal Boosting Global Asset Allocation Capabilities   [Oct-02-17 02:00PM  Business Wire]
▶ Principal Appoints New Chief Risk Officer   [12:00PM  Business Wire]
▶ Principal to Announce Third Quarter 2017 Financial Results   [Sep-28-17 04:15PM  Business Wire]
▶ Principal Charity Classic Shatters Charitable Giving Record   [Sep-25-17 01:30PM  Business Wire]
▶ Principal┬« Announces Real Estate Exchange Agreement   [Sep-20-17 02:54PM  Business Wire]
▶ [$$] Germany Votes as Market Prospects Brighten   [Sep-15-17 10:57PM  Barrons.com]
Financial statements of PFG
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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