Intrinsic value of Reynolds American - RAI

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$65.00

  Intrinsic Value

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  Value-price divergence*

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

We calculate the intrinsic value of RAI 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 92.6

 

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, %
  17.12
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  12,503
  12,753
  13,046
  13,382
  13,758
  14,175
  14,633
  15,131
  15,671
  16,252
  16,876
  17,543
  18,255
  19,013
  19,818
  20,673
  21,579
  22,538
  23,553
  24,624
  25,755
  26,949
  28,208
  29,535
  30,934
  32,406
  33,957
  35,589
  37,306
  39,113
  41,013
Variable operating expenses, $m
 
  4,419
  4,484
  4,558
  4,641
  4,733
  4,834
  4,945
  5,064
  5,192
  5,330
  3,879
  4,036
  4,204
  4,382
  4,571
  4,771
  4,983
  5,207
  5,444
  5,694
  5,958
  6,237
  6,530
  6,839
  7,165
  7,508
  7,869
  8,248
  8,648
  9,068
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
  1,934
  4,419
  4,484
  4,558
  4,641
  4,733
  4,834
  4,945
  5,064
  5,192
  5,330
  3,879
  4,036
  4,204
  4,382
  4,571
  4,771
  4,983
  5,207
  5,444
  5,694
  5,958
  6,237
  6,530
  6,839
  7,165
  7,508
  7,869
  8,248
  8,648
  9,068
Operating income, $m
  10,569
  8,334
  8,563
  8,824
  9,117
  9,442
  9,798
  10,187
  10,607
  11,059
  11,545
  13,664
  14,219
  14,809
  15,437
  16,103
  16,808
  17,555
  18,345
  19,180
  20,061
  20,991
  21,972
  23,005
  24,094
  25,241
  26,449
  27,720
  29,058
  30,465
  31,946
EBITDA, $m
  10,692
  10,979
  11,232
  11,520
  11,844
  12,204
  12,598
  13,027
  13,491
  13,991
  14,528
  15,103
  15,716
  16,368
  17,062
  17,798
  18,578
  19,403
  20,276
  21,199
  22,173
  23,201
  24,285
  25,427
  26,631
  27,899
  29,234
  30,639
  32,117
  33,673
  35,309
Interest expense (income), $m
  712
  595
  622
  654
  690
  731
  777
  826
  880
  939
  1,002
  1,070
  1,142
  1,219
  1,302
  1,389
  1,482
  1,580
  1,684
  1,795
  1,911
  2,034
  2,163
  2,300
  2,444
  2,596
  2,756
  2,924
  3,101
  3,288
  3,484
Earnings before tax, $m
  9,691
  7,739
  7,941
  8,170
  8,427
  8,711
  9,022
  9,360
  9,726
  10,120
  10,543
  12,594
  13,077
  13,590
  14,135
  14,713
  15,326
  15,975
  16,661
  17,385
  18,150
  18,957
  19,808
  20,705
  21,650
  22,646
  23,693
  24,796
  25,957
  27,178
  28,462
Tax expense, $m
  3,618
  2,090
  2,144
  2,206
  2,275
  2,352
  2,436
  2,527
  2,626
  2,733
  2,847
  3,400
  3,531
  3,669
  3,816
  3,973
  4,138
  4,313
  4,498
  4,694
  4,901
  5,118
  5,348
  5,590
  5,846
  6,114
  6,397
  6,695
  7,008
  7,338
  7,685
Net income, $m
  6,073
  5,649
  5,797
  5,964
  6,151
  6,359
  6,586
  6,833
  7,100
  7,388
  7,697
  9,194
  9,546
  9,920
  10,319
  10,741
  11,188
  11,662
  12,162
  12,691
  13,250
  13,839
  14,460
  15,115
  15,805
  16,531
  17,296
  18,101
  18,948
  19,840
  20,777

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,051
  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
  51,095
  50,012
  51,162
  52,477
  53,953
  55,589
  57,384
  59,338
  61,454
  63,733
  66,178
  68,795
  71,587
  74,560
  77,719
  81,072
  84,625
  88,386
  92,363
  96,565
  101,002
  105,684
  110,621
  115,825
  121,308
  127,084
  133,164
  139,564
  146,299
  153,384
  160,837
Adjusted assets (=assets-cash), $m
  49,044
  50,012
  51,162
  52,477
  53,953
  55,589
  57,384
  59,338
  61,454
  63,733
  66,178
  68,795
  71,587
  74,560
  77,719
  81,072
  84,625
  88,386
  92,363
  96,565
  101,002
  105,684
  110,621
  115,825
  121,308
  127,084
  133,164
  139,564
  146,299
  153,384
  160,837
Revenue / Adjusted assets
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
  0.255
Average production assets, $m
  30,757
  31,373
  32,094
  32,919
  33,845
  34,871
  35,997
  37,223
  38,550
  39,979
  41,514
  43,155
  44,907
  46,772
  48,753
  50,857
  53,085
  55,444
  57,939
  60,575
  63,359
  66,295
  69,393
  72,657
  76,097
  79,720
  83,534
  87,549
  91,773
  96,218
  100,893
Working capital, $m
  -747
  -1,275
  -1,305
  -1,338
  -1,376
  -1,418
  -1,463
  -1,513
  -1,567
  -1,625
  -1,688
  -1,754
  -1,825
  -1,901
  -1,982
  -2,067
  -2,158
  -2,254
  -2,355
  -2,462
  -2,576
  -2,695
  -2,821
  -2,954
  -3,093
  -3,241
  -3,396
  -3,559
  -3,731
  -3,911
  -4,101
Total debt, $m
  13,165
  13,238
  13,916
  14,690
  15,560
  16,523
  17,580
  18,731
  19,977
  21,319
  22,760
  24,301
  25,946
  27,697
  29,558
  31,532
  33,625
  35,840
  38,183
  40,658
  43,271
  46,029
  48,937
  52,002
  55,232
  58,633
  62,215
  65,984
  69,951
  74,124
  78,514
Total liabilities, $m
  29,384
  29,457
  30,135
  30,909
  31,779
  32,742
  33,799
  34,950
  36,196
  37,538
  38,979
  40,520
  42,165
  43,916
  45,777
  47,751
  49,844
  52,059
  54,402
  56,877
  59,490
  62,248
  65,156
  68,221
  71,451
  74,852
  78,434
  82,203
  86,170
  90,343
  94,733
Total equity, $m
  21,711
  20,555
  21,028
  21,568
  22,175
  22,847
  23,585
  24,388
  25,257
  26,194
  27,199
  28,275
  29,422
  30,644
  31,943
  33,321
  34,781
  36,327
  37,961
  39,688
  41,512
  43,436
  45,465
  47,604
  49,858
  52,231
  54,730
  57,361
  60,129
  63,041
  66,104
Total liabilities and equity, $m
  51,095
  50,012
  51,163
  52,477
  53,954
  55,589
  57,384
  59,338
  61,453
  63,732
  66,178
  68,795
  71,587
  74,560
  77,720
  81,072
  84,625
  88,386
  92,363
  96,565
  101,002
  105,684
  110,621
  115,825
  121,309
  127,083
  133,164
  139,564
  146,299
  153,384
  160,837
Debt-to-equity ratio
  0.606
  0.640
  0.660
  0.680
  0.700
  0.720
  0.750
  0.770
  0.790
  0.810
  0.840
  0.860
  0.880
  0.900
  0.930
  0.950
  0.970
  0.990
  1.010
  1.020
  1.040
  1.060
  1.080
  1.090
  1.110
  1.120
  1.140
  1.150
  1.160
  1.180
  1.190
Adjusted equity ratio
  0.401
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411
  0.411

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,073
  5,649
  5,797
  5,964
  6,151
  6,359
  6,586
  6,833
  7,100
  7,388
  7,697
  9,194
  9,546
  9,920
  10,319
  10,741
  11,188
  11,662
  12,162
  12,691
  13,250
  13,839
  14,460
  15,115
  15,805
  16,531
  17,296
  18,101
  18,948
  19,840
  20,777
Depreciation, amort., depletion, $m
  123
  2,645
  2,669
  2,696
  2,727
  2,762
  2,799
  2,840
  2,884
  2,932
  2,983
  1,439
  1,497
  1,559
  1,625
  1,695
  1,770
  1,848
  1,931
  2,019
  2,112
  2,210
  2,313
  2,422
  2,537
  2,657
  2,784
  2,918
  3,059
  3,207
  3,363
Funds from operations, $m
  1,014
  8,294
  8,466
  8,660
  8,879
  9,120
  9,385
  9,673
  9,984
  10,320
  10,680
  10,632
  11,043
  11,480
  11,944
  12,436
  12,958
  13,510
  14,094
  14,710
  15,362
  16,049
  16,773
  17,537
  18,341
  19,189
  20,081
  21,020
  22,008
  23,047
  24,140
Change in working capital, $m
  -266
  -25
  -29
  -34
  -38
  -42
  -46
  -50
  -54
  -58
  -62
  -67
  -71
  -76
  -81
  -85
  -91
  -96
  -101
  -107
  -113
  -119
  -126
  -133
  -140
  -147
  -155
  -163
  -172
  -181
  -190
Cash from operations, $m
  1,280
  8,319
  8,495
  8,694
  8,916
  9,162
  9,431
  9,723
  10,038
  10,378
  10,742
  10,699
  11,114
  11,555
  12,024
  12,521
  13,048
  13,606
  14,195
  14,818
  15,475
  16,168
  16,899
  17,669
  18,481
  19,336
  20,236
  21,183
  22,179
  23,228
  24,330
Maintenance CAPEX, $m
  0
  -1,025
  -1,046
  -1,070
  -1,097
  -1,128
  -1,162
  -1,200
  -1,241
  -1,285
  -1,333
  -1,384
  -1,439
  -1,497
  -1,559
  -1,625
  -1,695
  -1,770
  -1,848
  -1,931
  -2,019
  -2,112
  -2,210
  -2,313
  -2,422
  -2,537
  -2,657
  -2,784
  -2,918
  -3,059
  -3,207
New CAPEX, $m
  -206
  -616
  -722
  -825
  -926
  -1,026
  -1,126
  -1,226
  -1,327
  -1,430
  -1,534
  -1,641
  -1,751
  -1,865
  -1,982
  -2,103
  -2,229
  -2,359
  -2,495
  -2,636
  -2,783
  -2,937
  -3,097
  -3,265
  -3,440
  -3,623
  -3,814
  -4,015
  -4,225
  -4,445
  -4,675
Cash from investing activities, $m
  5,078
  -1,641
  -1,768
  -1,895
  -2,023
  -2,154
  -2,288
  -2,426
  -2,568
  -2,715
  -2,867
  -3,025
  -3,190
  -3,362
  -3,541
  -3,728
  -3,924
  -4,129
  -4,343
  -4,567
  -4,802
  -5,049
  -5,307
  -5,578
  -5,862
  -6,160
  -6,471
  -6,799
  -7,143
  -7,504
  -7,882
Free cash flow, $m
  6,358
  6,679
  6,728
  6,799
  6,893
  7,008
  7,143
  7,297
  7,471
  7,663
  7,875
  7,674
  7,924
  8,194
  8,483
  8,793
  9,124
  9,477
  9,852
  10,250
  10,672
  11,119
  11,592
  12,092
  12,620
  13,177
  13,764
  14,384
  15,036
  15,724
  16,448
Issuance/(repayment) of debt, $m
  -500
  574
  678
  774
  869
  963
  1,057
  1,151
  1,246
  1,342
  1,441
  1,541
  1,645
  1,751
  1,861
  1,975
  2,093
  2,215
  2,342
  2,475
  2,613
  2,758
  2,908
  3,065
  3,230
  3,402
  3,581
  3,770
  3,967
  4,173
  4,390
Issuance/(repurchase) of shares, $m
  -226
  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  
  -4,497
  574
  678
  774
  869
  963
  1,057
  1,151
  1,246
  1,342
  1,441
  1,541
  1,645
  1,751
  1,861
  1,975
  2,093
  2,215
  2,342
  2,475
  2,613
  2,758
  2,908
  3,065
  3,230
  3,402
  3,581
  3,770
  3,967
  4,173
  4,390
Total cash flow (excl. dividends), $m
  1,853
  7,253
  7,405
  7,574
  7,763
  7,971
  8,200
  8,448
  8,717
  9,006
  9,316
  9,215
  9,569
  9,945
  10,344
  10,768
  11,217
  11,692
  12,195
  12,725
  13,286
  13,877
  14,500
  15,157
  15,849
  16,578
  17,345
  18,153
  19,003
  19,897
  20,837
Retained Cash Flow (-), $m
  -3,459
  -394
  -473
  -540
  -607
  -672
  -738
  -803
  -869
  -937
  -1,005
  -1,075
  -1,148
  -1,222
  -1,299
  -1,378
  -1,460
  -1,546
  -1,635
  -1,727
  -1,824
  -1,924
  -2,029
  -2,139
  -2,254
  -2,374
  -2,499
  -2,630
  -2,768
  -2,912
  -3,063
Prev. year cash balance distribution, $m
 
  1,550
  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
 
  8,409
  6,932
  7,033
  7,156
  7,299
  7,462
  7,645
  7,847
  8,069
  8,310
  8,140
  8,421
  8,723
  9,046
  9,390
  9,757
  10,146
  10,560
  10,998
  11,462
  11,953
  12,471
  13,018
  13,596
  14,205
  14,846
  15,523
  16,235
  16,985
  17,774
Discount rate, %
 
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.51
  9.99
  10.49
  11.01
  11.57
  12.14
  12.75
  13.39
  14.06
  14.76
  15.50
  16.27
  17.09
  17.94
  18.84
  19.78
  20.77
  21.81
  22.90
  24.04
  25.25
  26.51
  27.83
  29.22
PV of cash for distribution, $m
 
  7,851
  6,004
  5,610
  5,217
  4,825
  4,434
  4,046
  3,663
  3,288
  2,923
  2,442
  2,129
  1,833
  1,558
  1,306
  1,078
  876
  700
  549
  423
  319
  235
  170
  119
  82
  55
  36
  22
  14
  8
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

Reynolds American Inc., through its subsidiaries, manufactures, and sells cigarettes and other tobacco products in the United States. It operates through RJR Tobacco, Santa Fe, and American Snuff segments. The RJR Tobacco segment offers cigarettes under the NEWPORT, CAMEL, PALL MALL, DORAL, MISTY, and CAPRI brands; and CAMEL Snus, a smoke-free tobacco product, as well as manages various licensed brands, including DUNHILL and STATE EXPRESS 555. The Santa Fe segment manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand. The American Snuff segment provides smokeless tobacco products, such as moist snuff under GRIZZLY and KODIAK brand names. The company also manufactures and markets digital vapor cigarettes under the VUSE brand name; and markets nicotine replacement therapy products under the ZONNIC brand. It distributes its products primarily through direct wholesale deliveries from a local distribution center and public warehouses. Reynolds American Inc. was founded in 2004 and is headquartered in Winston-Salem, North Carolina.

FINANCIAL RATIOS  of  Reynolds American (RAI)

Valuation Ratios
P/E Ratio 15.3
Price to Sales 7.4
Price to Book 4.3
Price to Tangible Book
Price to Cash Flow 72.4
Price to Free Cash Flow 86.3
Growth Rates
Sales Growth Rate 17.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 18.4%
Cap. Spend. - 3 Yr. Gr. Rate 6.1%
Financial Strength
Quick Ratio 4
Current Ratio 0.1
LT Debt to Equity 58.3%
Total Debt to Equity 60.6%
Interest Coverage 15
Management Effectiveness
Return On Assets 12.6%
Ret/ On Assets - 3 Yr. Avg. 11.2%
Return On Total Capital 17.2%
Ret/ On T. Cap. - 3 Yr. Avg. 15.5%
Return On Equity 30.4%
Return On Equity - 3 Yr. Avg. 29.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 61.3%
Gross Margin - 3 Yr. Avg. 56.5%
EBITDA Margin 84.2%
EBITDA Margin - 3 Yr. Avg. 60.3%
Operating Margin 84.5%
Oper. Margin - 3 Yr. Avg. 59.8%
Pre-Tax Margin 77.5%
Pre-Tax Margin - 3 Yr. Avg. 54.7%
Net Profit Margin 48.6%
Net Profit Margin - 3 Yr. Avg. 32.1%
Effective Tax Rate 37.3%
Eff/ Tax Rate - 3 Yr. Avg. 40.8%
Payout Ratio 39%

RAI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RAI stock intrinsic value calculation we used $12503 million for the last fiscal year's total revenue generated by Reynolds American. The default revenue input number comes from 2016 income statement of Reynolds American. 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 RAI stock valuation model: a) initial revenue growth rate of 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 7.1%, whose default value for RAI is calculated based on our internal credit rating of Reynolds American, 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 Reynolds American.
    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 RAI stock the variable cost ratio is equal to 34.9%.

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 RAI 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 4.7% for Reynolds American.

Corporate tax rate of 27% is the nominal tax rate for Reynolds American. 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 RAI 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 RAI are equal to 246%.

Life of production assets of 380.1 years is the average useful life of capital assets used in Reynolds American 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 RAI is equal to -10%. 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 - $21711 million for Reynolds American - 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 1425 million for Reynolds American 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 Reynolds American at the current share price and the inputted number of shares is $92.6 billion.


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COMPANY NEWS

▶ Business Highlights   [05:48PM  Associated Press]
▶ Reynolds shareholders approve $54.5B acquisition by BAT   [12:34PM  American City Business Journals]
▶ [$$] A New Generation Is Poised to Take Control of KKR   [Jul-18-17 12:46AM  The Wall Street Journal]
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▶ The Top Dividend-Growing Consumer Staples Stocks   [Jul-12-17 02:44PM  Market Realist]
▶ Reynolds introduces new twist on top-selling, Triad-made Newport brand   [09:12AM  American City Business Journals]
▶ Federal appeals court upholds $28M verdict against R.J. Reynolds   [06:31AM  American City Business Journals]
▶ Better Buy: Coca-Cola vs. Reynolds American   [Jul-09-17 10:34AM  Motley Fool]
▶ What's the Future of Cigarette Stocks?   [Jul-05-17 09:14AM  Motley Fool]
▶ These Iconic Brands Are as Old as America   [Jul-04-17 09:33AM  Motley Fool]
▶ Altria and Philip Morris' Worst Move So Far in 2017   [Jun-29-17 08:47AM  Motley Fool]
▶ Video Shows Diamond Reynolds in Back of Cop Car   [Jun-21-17 06:25PM  Associated Press Videos]
▶ Does This Trend Spell Doom for U.S. Tobacco Companies?   [Jun-20-17 12:47PM  Motley Fool]
▶ Tobacco Stocks Probing New Highs   [Jun-15-17 01:39PM  Investopedia]
▶ Raising Fair Value of Reynolds American   [12:30AM  Morningstar]
▶ A look at N.C.'s top 100 public companies   [09:25AM  American City Business Journals]
▶ 5 Triad-area companies place on Fortune 500 list   [Jun-07-17 03:18PM  American City Business Journals]
▶ Better Buy: Altria Group Inc. vs. Reynolds American   [Jun-05-17 10:39AM  Motley Fool]
▶ RAI post-acquisition leadership team announced   [May-30-17 04:19PM  PR Newswire]
▶ David Dreman Buys JPMorgan, Kroger, Reynolds   [May-26-17 05:41PM  GuruFocus.com]
▶ Chipotle Upgraded, PayPal Downgraded; Altria, Philip Morris Are Buys   [May-25-17 04:06PM  Investor's Business Daily]
▶ Top Defensive Consumer Stocks for 2017   [May-24-17 06:00AM  Investopedia]
▶ Reynolds and Reynolds sells subsidiary   [07:10AM  American City Business Journals]
▶ Company News for May 04, 2017   [10:08AM  Zacks]
▶ Tobacco Industry Earnings Reverse Winning Streak   [May-03-17 04:42PM  Investopedia]
▶ Reynolds American Revenue Up in 1st Quarter   [02:06PM  GuruFocus.com]
▶ Reynolds American misses 1Q profit forecasts   [07:39AM  Associated Press]
▶ Enthusiasm for buybacks has faded   [12:58PM  Yahoo Finance]
▶ [$$] Against All Odds, the U.S. Tobacco Industry Is Rolling in Money   [Apr-24-17 12:02AM  The Wall Street Journal]
▶ RAI to release 1Q17 results on May 3   [Apr-19-17 08:30AM  PR Newswire]
▶ Reynolds finalizes Whitaker Park plant donation to local redevelopment group   [Apr-13-17 02:55PM  American City Business Journals]
▶ 10 Best Selling Cigarette Brands In India   [Apr-11-17 09:00AM  Insider Monkey]
▶ British American-Reynolds American Deal Approved in Japan   [Apr-06-17 12:03PM  GuruFocus.com]
▶ MO, PM, and RAI: Comparing Valuation Multiples   [Mar-31-17 07:36AM  Market Realist]
▶ The 3 Best E-Cigarette Stocks to Buy in 2017   [Mar-30-17 04:23PM  Motley Fool]
▶ Reynolds American Expanded Its EBITDA Margin   [11:26AM  Market Realist]
▶ 4 Top Dividend Stocks in Tobacco   [Mar-27-17 01:00PM  at Motley Fool]
▶ 5 Best Selling Ultra-Light Cigarettes in the World   [01:44PM  at Insider Monkey]
Stock chart of RAI Financial statements of RAI Annual reports of RAI
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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