Intrinsic value of Principal Financial Group - PFG

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$62.69

  Intrinsic Value

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  Value-price divergence*

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$62.69

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

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

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

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 17.9

 

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
  25.80
  23.72
  21.85
  20.16
  18.65
  17.28
  16.05
  14.95
  13.95
  13.06
  12.25
  11.53
  10.87
  10.29
  9.76
  9.28
  8.85
  8.47
  8.12
  7.81
  7.53
  7.28
  7.05
  6.84
  6.66
  6.49
  6.34
  6.21
  6.09
  5.98
Revenue, $m
  0
  15,716
  19,444
  23,692
  28,469
  33,778
  39,616
  45,975
  52,848
  60,222
  68,086
  76,429
  85,239
  94,508
  104,230
  114,401
  125,021
  136,090
  147,616
  159,605
  172,070
  185,025
  198,487
  212,477
  227,018
  242,135
  257,858
  274,216
  291,243
  308,976
  327,452
Variable operating expenses, $m
 
  10,614
  13,107
  15,948
  19,143
  22,694
  26,598
  30,852
  35,448
  40,380
  45,640
  51,118
  57,010
  63,210
  69,712
  76,515
  83,617
  91,021
  98,729
  106,748
  115,085
  123,750
  132,754
  142,110
  151,836
  161,947
  172,462
  183,403
  194,792
  206,652
  219,009
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
  13,185
  15,742
  18,649
  21,911
  25,532
  29,507
  33,833
  38,504
  43,512
  48,850
  54,409
  60,383
  66,667
  73,256
  80,147
  87,340
  94,837
  102,641
  110,757
  119,195
  127,962
  137,072
  146,536
  156,372
  166,597
  177,228
  188,288
  199,799
  211,784
  224,270
Operating income, $m
  1,592
  2,532
  3,702
  5,043
  6,558
  8,247
  10,109
  12,142
  14,344
  16,710
  19,236
  22,020
  24,856
  27,841
  30,974
  34,254
  37,680
  41,253
  44,975
  48,847
  52,875
  57,063
  61,416
  65,941
  70,646
  75,539
  80,629
  85,928
  91,445
  97,192
  103,182
EBITDA, $m
  2,064
  2,970
  4,220
  5,652
  7,269
  9,072
  11,059
  13,228
  15,577
  18,101
  20,795
  23,656
  26,680
  29,864
  33,205
  36,702
  40,356
  44,166
  48,134
  52,263
  56,557
  61,022
  65,663
  70,488
  75,504
  80,721
  86,148
  91,796
  97,677
  103,804
  110,190
Interest expense (income), $m
  162
  156
  2,086
  5,075
  8,481
  12,311
  16,568
  21,249
  26,348
  31,859
  37,771
  44,077
  50,766
  57,830
  65,262
  73,058
  81,213
  89,728
  98,604
  107,845
  117,458
  127,453
  137,840
  148,635
  159,852
  171,511
  183,633
  196,239
  209,355
  223,008
  237,227
Earnings before tax, $m
  1,592
  2,376
  1,617
  -31
  -1,923
  -4,065
  -6,459
  -9,106
  -12,004
  -15,149
  -18,536
  -22,057
  -25,910
  -29,989
  -34,288
  -38,804
  -43,533
  -48,475
  -53,629
  -58,998
  -64,583
  -70,390
  -76,425
  -82,694
  -89,206
  -95,972
  -103,003
  -110,311
  -117,911
  -125,816
  -134,044
Tax expense, $m
  230
  642
  436
  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
  1,735
  1,180
  -31
  -1,923
  -4,065
  -6,459
  -9,106
  -12,004
  -15,149
  -18,536
  -22,057
  -25,910
  -29,989
  -34,288
  -38,804
  -43,533
  -48,475
  -53,629
  -58,998
  -64,583
  -70,390
  -76,425
  -82,694
  -89,206
  -95,972
  -103,003
  -110,311
  -117,911
  -125,816
  -134,044

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
  285,749
  353,529
  430,768
  517,624
  614,145
  720,283
  835,917
  960,874
  1,094,952
  1,237,934
  1,389,612
  1,549,797
  1,718,330
  1,895,096
  2,080,026
  2,273,106
  2,474,373
  2,683,924
  2,901,911
  3,128,544
  3,364,085
  3,608,853
  3,863,217
  4,127,596
  4,402,458
  4,688,320
  4,985,743
  5,295,333
  5,617,743
  5,953,667
Adjusted assets (=assets-cash), $m
  228,014
  285,749
  353,529
  430,768
  517,624
  614,145
  720,283
  835,917
  960,874
  1,094,952
  1,237,934
  1,389,612
  1,549,797
  1,718,330
  1,895,096
  2,080,026
  2,273,106
  2,474,373
  2,683,924
  2,901,911
  3,128,544
  3,364,085
  3,608,853
  3,863,217
  4,127,596
  4,402,458
  4,688,320
  4,985,743
  5,295,333
  5,617,743
  5,953,667
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
  1,682
  2,081
  2,535
  3,046
  3,614
  4,239
  4,919
  5,655
  6,444
  7,285
  8,178
  9,121
  10,112
  11,153
  12,241
  13,377
  14,562
  15,795
  17,078
  18,411
  19,798
  21,238
  22,735
  24,291
  25,908
  27,591
  29,341
  31,163
  33,060
  35,037
Working capital, $m
  0
  63
  78
  95
  114
  135
  158
  184
  211
  241
  272
  306
  341
  378
  417
  458
  500
  544
  590
  638
  688
  740
  794
  850
  908
  969
  1,031
  1,097
  1,165
  1,236
  1,310
Total debt, $m
  3,177
  42,564
  103,566
  173,081
  251,252
  338,120
  433,644
  537,715
  650,177
  770,847
  899,531
  1,036,041
  1,180,207
  1,331,887
  1,490,976
  1,657,414
  1,831,185
  2,012,325
  2,200,921
  2,397,110
  2,601,079
  2,813,067
  3,033,358
  3,262,285
  3,500,226
  3,747,603
  4,004,878
  4,272,558
  4,551,190
  4,841,359
  5,143,691
Total liabilities, $m
  217,787
  257,174
  318,176
  387,691
  465,862
  552,730
  648,254
  752,325
  864,787
  985,457
  1,114,141
  1,250,651
  1,394,817
  1,546,497
  1,705,586
  1,872,024
  2,045,795
  2,226,935
  2,415,531
  2,611,720
  2,815,689
  3,027,677
  3,247,968
  3,476,895
  3,714,836
  3,962,213
  4,219,488
  4,487,168
  4,765,800
  5,055,969
  5,358,301
Total equity, $m
  10,227
  28,575
  35,353
  43,077
  51,762
  61,414
  72,028
  83,592
  96,087
  109,495
  123,793
  138,961
  154,980
  171,833
  189,510
  208,003
  227,311
  247,437
  268,392
  290,191
  312,854
  336,409
  360,885
  386,322
  412,760
  440,246
  468,832
  498,574
  529,533
  561,774
  595,367
Total liabilities and equity, $m
  228,014
  285,749
  353,529
  430,768
  517,624
  614,144
  720,282
  835,917
  960,874
  1,094,952
  1,237,934
  1,389,612
  1,549,797
  1,718,330
  1,895,096
  2,080,027
  2,273,106
  2,474,372
  2,683,923
  2,901,911
  3,128,543
  3,364,086
  3,608,853
  3,863,217
  4,127,596
  4,402,459
  4,688,320
  4,985,742
  5,295,333
  5,617,743
  5,953,668
Debt-to-equity ratio
  0.311
  1.490
  2.930
  4.020
  4.850
  5.510
  6.020
  6.430
  6.770
  7.040
  7.270
  7.460
  7.620
  7.750
  7.870
  7.970
  8.060
  8.130
  8.200
  8.260
  8.310
  8.360
  8.410
  8.440
  8.480
  8.510
  8.540
  8.570
  8.590
  8.620
  8.640
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
  1,735
  1,180
  -31
  -1,923
  -4,065
  -6,459
  -9,106
  -12,004
  -15,149
  -18,536
  -22,057
  -25,910
  -29,989
  -34,288
  -38,804
  -43,533
  -48,475
  -53,629
  -58,998
  -64,583
  -70,390
  -76,425
  -82,694
  -89,206
  -95,972
  -103,003
  -110,311
  -117,911
  -125,816
  -134,044
Depreciation, amort., depletion, $m
  472
  438
  518
  609
  711
  825
  950
  1,086
  1,233
  1,391
  1,559
  1,636
  1,824
  2,022
  2,231
  2,448
  2,675
  2,912
  3,159
  3,416
  3,682
  3,960
  4,248
  4,547
  4,858
  5,182
  5,518
  5,868
  6,233
  6,612
  7,007
Funds from operations, $m
  5,655
  2,173
  1,698
  578
  -1,212
  -3,240
  -5,509
  -8,020
  -10,771
  -13,758
  -16,977
  -20,421
  -24,086
  -27,966
  -32,057
  -36,355
  -40,858
  -45,563
  -50,470
  -55,582
  -60,901
  -66,431
  -72,177
  -78,147
  -84,348
  -90,791
  -97,485
  -104,443
  -111,678
  -119,204
  -127,037
Change in working capital, $m
  1,797
  13
  15
  17
  19
  21
  23
  25
  27
  29
  31
  33
  35
  37
  39
  41
  42
  44
  46
  48
  50
  52
  54
  56
  58
  60
  63
  65
  68
  71
  74
Cash from operations, $m
  3,858
  2,143
  1,683
  561
  -1,231
  -3,261
  -5,532
  -8,046
  -10,798
  -13,788
  -17,008
  -20,454
  -24,121
  -28,004
  -32,096
  -36,396
  -40,900
  -45,607
  -50,516
  -55,630
  -60,951
  -66,482
  -72,231
  -78,203
  -84,406
  -90,851
  -97,548
  -104,509
  -111,746
  -119,275
  -127,111
Maintenance CAPEX, $m
  0
  -268
  -336
  -416
  -507
  -609
  -723
  -848
  -984
  -1,131
  -1,289
  -1,457
  -1,636
  -1,824
  -2,022
  -2,231
  -2,448
  -2,675
  -2,912
  -3,159
  -3,416
  -3,682
  -3,960
  -4,248
  -4,547
  -4,858
  -5,182
  -5,518
  -5,868
  -6,233
  -6,612
New CAPEX, $m
  -155
  -340
  -399
  -455
  -511
  -568
  -625
  -681
  -735
  -789
  -841
  -893
  -943
  -992
  -1,040
  -1,088
  -1,136
  -1,184
  -1,233
  -1,283
  -1,334
  -1,386
  -1,440
  -1,497
  -1,556
  -1,618
  -1,682
  -1,750
  -1,822
  -1,897
  -1,977
Cash from investing activities, $m
  -5,154
  -608
  -735
  -871
  -1,018
  -1,177
  -1,348
  -1,529
  -1,719
  -1,920
  -2,130
  -2,350
  -2,579
  -2,816
  -3,062
  -3,319
  -3,584
  -3,859
  -4,145
  -4,442
  -4,750
  -5,068
  -5,400
  -5,745
  -6,103
  -6,476
  -6,864
  -7,268
  -7,690
  -8,130
  -8,589
Free cash flow, $m
  -1,296
  1,535
  948
  -310
  -2,249
  -4,438
  -6,880
  -9,574
  -12,518
  -15,708
  -19,138
  -22,804
  -26,700
  -30,819
  -35,159
  -39,715
  -44,484
  -49,467
  -54,662
  -60,072
  -65,700
  -71,551
  -77,631
  -83,947
  -90,509
  -97,327
  -104,412
  -111,777
  -119,436
  -127,405
  -135,700
Issuance/(repayment) of debt, $m
  -275
  39,387
  61,002
  69,515
  78,171
  86,869
  95,524
  104,071
  112,462
  120,670
  128,684
  136,510
  144,166
  151,680
  159,089
  166,437
  173,771
  181,140
  188,596
  196,189
  203,969
  211,987
  220,291
  228,927
  237,941
  247,376
  257,275
  267,680
  278,631
  290,169
  302,332
Issuance/(repurchase) of shares, $m
  -240
  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  
  1,916
  39,387
  61,002
  69,515
  78,171
  86,869
  95,524
  104,071
  112,462
  120,670
  128,684
  136,510
  144,166
  151,680
  159,089
  166,437
  173,771
  181,140
  188,596
  196,189
  203,969
  211,987
  220,291
  228,927
  237,941
  247,376
  257,275
  267,680
  278,631
  290,169
  302,332
Total cash flow (excl. dividends), $m
  620
  40,922
  61,950
  69,205
  75,922
  82,430
  88,644
  94,497
  99,944
  104,962
  109,546
  113,706
  117,466
  120,860
  123,930
  126,723
  129,287
  131,674
  133,934
  136,117
  138,269
  140,437
  142,660
  144,980
  147,432
  150,049
  152,864
  155,903
  159,195
  162,764
  166,632
Retained Cash Flow (-), $m
  -915
  -18,348
  -6,778
  -7,724
  -8,686
  -9,652
  -10,614
  -11,563
  -12,496
  -13,408
  -14,298
  -15,168
  -16,018
  -16,853
  -17,677
  -18,493
  -19,308
  -20,127
  -20,955
  -21,799
  -22,663
  -23,554
  -24,477
  -25,436
  -26,438
  -27,486
  -28,586
  -29,742
  -30,959
  -32,241
  -33,592
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
 
  22,574
  55,172
  61,481
  67,236
  72,778
  78,030
  82,933
  87,448
  91,555
  95,248
  98,538
  101,448
  104,007
  106,254
  108,230
  109,979
  111,547
  112,979
  114,318
  115,606
  116,882
  118,184
  119,544
  120,994
  122,563
  124,278
  126,161
  128,236
  130,523
  133,040
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
 
  21,644
  50,508
  53,505
  55,362
  56,412
  56,630
  56,029
  54,657
  52,593
  49,935
  46,794
  43,291
  39,545
  35,671
  31,774
  27,948
  24,271
  20,806
  17,602
  14,690
  12,090
  9,806
  7,835
  6,162
  4,768
  3,626
  2,708
  1,984
  1,425
  1,002
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

Principal Financial Group, Inc. provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide. It operates through Retirement and Income Solutions, Principal Global Investors, Principal International, and U.S. Insurance Solutions segments. The Retirement and Income Solutions segment provides a portfolio of asset accumulation products and services, including retirement savings and income. It offers products and services for defined contribution pension plans, including 401(k) and 403(b) plans, defined benefit pension plans, nonqualified executive benefit plans, and employee stock ownership plans; individual retirement accounts and payroll deduction plans; investment-only products; and annuities, mutual funds, and bank products. The Principal Global Investors segment provides equity, fixed income, real estate, and other alternative investments, as well as asset allocation, stable value management, and other structured investment strategies. The Principal International segment offers pension accumulation and income annuity products, mutual funds, asset management, and life insurance accumulation products, as well as voluntary savings plans in Brazil, Chile, China, Hong Kong Special Administrative Region, India, Mexico, and the Southeast Asia. The U.S. Insurance Solutions segment provides specialty benefits consisting of group dental and vision insurance, individual and group disability insurance, and group life insurance; and individual life insurance products comprising universal and variable universal life insurance and term life insurance, as well as non-medical fee-for-service claims administration services in the United States. It also provides insurance solutions for small and medium-sized businesses and their owners, as well as executives. Principal Financial Group, Inc. was founded in 1879 and is based in Des Moines, Iowa.

FINANCIAL RATIOS  of  Principal Financial Group (PFG)

Valuation Ratios
P/E Ratio 13.7
Price to Sales 1.4
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 4.7
Price to Free Cash Flow 4.9
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 25.8% 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 286.317 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 $17.9 billion.


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COMPANY NEWS

▶ Britannia No Longer Rules for Investors   [Jun-19-17 12:00AM  The Wall Street Journal]
▶ Britannia No Longer Rules for Investors   [Jun-18-17 02:00PM  The Wall Street Journal]
▶ Sixteen Years Running, Principal IT Still Rocks   [Jun-13-17 02:14PM  Business Wire]
▶ Principal Financial beats 1Q profit forecasts   [Apr-27-17 07:00PM  Associated Press]
▶ Retro-modern is the design world's comfort food at Milan   [Apr-11-17 10:56AM  Associated Press]
▶ Principal Launches Two New Variable Annuities   [Apr-06-17 01:00PM  Business Wire]
▶ Principal to Announce First Quarter 2017 Financial Results   [Apr-03-17 04:15PM  Business Wire]
▶ 4 Top-Rated Principal Mutual Funds to Consider   [Mar-21-17 09:06AM  Zacks]
▶ Principal Again Named a Top Company for Executive Women   [Feb-28-17 02:03PM  Business Wire]
▶ 4 Legendary Investor Picks For The Trump Rally   [Feb-21-17 10:47AM  at Forbes]
▶ Principal Asia Chair to Retire   [Feb-13-17 06:00PM  Business Wire]
▶ Eight Dividend Stocks Rewarding Shareholders With A Raise   [Feb-07-17 12:55PM  at Insider Monkey]
▶ Principal to Announce Fourth Quarter 2016 Financial Results   [Jan-04-17 04:30PM  Business Wire]
▶ Fiduciary Focus: A Glimpse into 403(b) Plan Trends   [Dec-14-16 10:33AM  Business Wire]
▶ Is Cabot Oil & Gas Corporation (COG) A Good Stock To Buy?   [Nov-25-16 05:59AM  at Insider Monkey]
▶ DOL Rule Could Boost Product Providers   [12:01AM  at Barrons.com]
Stock chart of PFG Financial statements of PFG Annual reports 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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