Intrinsic value of Tesoro - TSO

Previous Close

$99.53

  Intrinsic Value

$2,071

stock screener

  Rating & Target

str. buy

+999%

  Value-price divergence*

+29%

Previous close

$99.53

 
Intrinsic value

$2,071

 
Up/down potential

+999%

 
Rating

str. buy

 
Value-price divergence*

+29%

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

We calculate the intrinsic value of TSO 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 11.2

 

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, %
  -14.38
  30.10
  27.59
  25.33
  23.30
  21.47
  19.82
  18.34
  17.01
  15.80
  14.72
  13.75
  12.88
  12.09
  11.38
  10.74
  10.17
  9.65
  9.19
  8.77
  8.39
  8.05
  7.75
  7.47
  7.22
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
Revenue, $m
  24,582
  31,981
  40,805
  51,141
  63,056
  76,593
  91,774
  108,605
  127,074
  147,157
  168,825
  192,042
  216,770
  242,975
  270,626
  299,697
  330,170
  362,035
  395,291
  429,948
  466,023
  503,546
  542,552
  583,091
  625,217
  668,995
  714,500
  761,812
  811,022
  862,226
  915,531
Variable operating expenses, $m
 
  21,550
  27,490
  34,449
  42,470
  51,583
  61,804
  73,135
  85,568
  99,089
  113,677
  129,288
  145,936
  163,578
  182,193
  201,764
  222,279
  243,732
  266,121
  289,453
  313,740
  339,001
  365,261
  392,552
  420,913
  450,386
  481,021
  512,872
  546,002
  580,474
  616,360
Fixed operating expenses, $m
 
  6,862
  7,034
  7,210
  7,390
  7,575
  7,764
  7,958
  8,157
  8,361
  8,570
  8,784
  9,004
  9,229
  9,460
  9,696
  9,939
  10,187
  10,442
  10,703
  10,971
  11,245
  11,526
  11,814
  12,109
  12,412
  12,722
  13,041
  13,367
  13,701
  14,043
Total operating expenses, $m
  23,101
  28,412
  34,524
  41,659
  49,860
  59,158
  69,568
  81,093
  93,725
  107,450
  122,247
  138,072
  154,940
  172,807
  191,653
  211,460
  232,218
  253,919
  276,563
  300,156
  324,711
  350,246
  376,787
  404,366
  433,022
  462,798
  493,743
  525,913
  559,369
  594,175
  630,403
Operating income, $m
  1,481
  3,569
  6,281
  9,483
  13,196
  17,435
  22,206
  27,512
  33,348
  39,707
  46,578
  53,970
  61,831
  70,169
  78,973
  88,237
  97,952
  108,116
  118,729
  129,792
  141,313
  153,300
  165,766
  178,724
  192,194
  206,197
  220,757
  235,899
  251,653
  268,052
  285,128
EBITDA, $m
  2,332
  4,674
  7,685
  11,237
  15,355
  20,053
  25,340
  31,217
  37,680
  44,720
  52,327
  60,487
  69,188
  78,415
  88,158
  98,408
  109,158
  120,403
  132,145
  144,385
  157,130
  170,390
  184,179
  198,514
  213,414
  228,903
  245,006
  261,754
  279,179
  297,315
  316,200
Interest expense (income), $m
  199
  233
  390
  577
  796
  1,048
  1,335
  1,657
  2,014
  2,405
  2,831
  3,290
  3,782
  4,306
  4,862
  5,448
  6,064
  6,710
  7,385
  8,090
  8,824
  9,589
  10,384
  11,211
  12,070
  12,963
  13,891
  14,855
  15,858
  16,901
  17,986
Earnings before tax, $m
  1,277
  3,336
  5,891
  8,906
  12,400
  16,386
  20,871
  25,855
  31,334
  37,302
  43,747
  50,679
  58,048
  65,862
  74,112
  82,789
  91,888
  101,406
  111,344
  121,703
  132,489
  143,711
  155,381
  167,513
  180,124
  193,234
  206,866
  221,044
  235,795
  251,151
  267,141
Tax expense, $m
  427
  901
  1,591
  2,405
  3,348
  4,424
  5,635
  6,981
  8,460
  10,071
  11,812
  13,683
  15,673
  17,783
  20,010
  22,353
  24,810
  27,380
  30,063
  32,860
  35,772
  38,802
  41,953
  45,229
  48,634
  52,173
  55,854
  59,682
  63,665
  67,811
  72,128
Net income, $m
  734
  2,436
  4,301
  6,501
  9,052
  11,962
  15,236
  18,874
  22,874
  27,230
  31,936
  36,996
  42,375
  48,080
  54,102
  60,436
  67,078
  74,027
  81,281
  88,843
  96,717
  104,909
  113,428
  122,285
  131,491
  141,061
  151,012
  161,362
  172,131
  183,340
  195,013

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  3,295
  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
  20,398
  22,256
  28,396
  35,589
  43,880
  53,300
  63,865
  75,578
  88,430
  102,406
  117,484
  133,641
  150,849
  169,085
  188,327
  208,558
  229,763
  251,938
  275,081
  299,198
  324,303
  350,415
  377,559
  405,769
  435,085
  465,550
  497,216
  530,141
  564,385
  600,018
  637,113
Adjusted assets (=assets-cash), $m
  17,103
  22,256
  28,396
  35,589
  43,880
  53,300
  63,865
  75,578
  88,430
  102,406
  117,484
  133,641
  150,849
  169,085
  188,327
  208,558
  229,763
  251,938
  275,081
  299,198
  324,303
  350,415
  377,559
  405,769
  435,085
  465,550
  497,216
  530,141
  564,385
  600,018
  637,113
Revenue / Adjusted assets
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
  1.437
Average production assets, $m
  11,003
  14,328
  18,281
  22,911
  28,249
  34,314
  41,115
  48,655
  56,929
  65,926
  75,634
  86,035
  97,113
  108,853
  121,241
  134,264
  147,916
  162,192
  177,091
  192,617
  208,779
  225,588
  243,063
  261,225
  280,097
  299,710
  320,096
  341,292
  363,338
  386,277
  410,158
Working capital, $m
  3,860
  1,343
  1,714
  2,148
  2,648
  3,217
  3,855
  4,561
  5,337
  6,181
  7,091
  8,066
  9,104
  10,205
  11,366
  12,587
  13,867
  15,205
  16,602
  18,058
  19,573
  21,149
  22,787
  24,490
  26,259
  28,098
  30,009
  31,996
  34,063
  36,214
  38,452
Total debt, $m
  6,933
  10,828
  16,023
  22,108
  29,123
  37,092
  46,030
  55,939
  66,812
  78,635
  91,392
  105,060
  119,618
  135,046
  151,325
  168,440
  186,380
  205,140
  224,719
  245,122
  266,360
  288,451
  311,415
  335,281
  360,082
  385,855
  412,645
  440,499
  469,470
  499,616
  530,998
Total liabilities, $m
  14,933
  18,828
  24,023
  30,108
  37,123
  45,092
  54,030
  63,939
  74,812
  86,635
  99,392
  113,060
  127,618
  143,046
  159,325
  176,440
  194,380
  213,140
  232,719
  253,122
  274,360
  296,451
  319,415
  343,281
  368,082
  393,855
  420,645
  448,499
  477,470
  507,616
  538,998
Total equity, $m
  5,465
  3,427
  4,373
  5,481
  6,758
  8,208
  9,835
  11,639
  13,618
  15,771
  18,093
  20,581
  23,231
  26,039
  29,002
  32,118
  35,384
  38,798
  42,362
  46,077
  49,943
  53,964
  58,144
  62,488
  67,003
  71,695
  76,571
  81,642
  86,915
  92,403
  98,115
Total liabilities and equity, $m
  20,398
  22,255
  28,396
  35,589
  43,881
  53,300
  63,865
  75,578
  88,430
  102,406
  117,485
  133,641
  150,849
  169,085
  188,327
  208,558
  229,764
  251,938
  275,081
  299,199
  324,303
  350,415
  377,559
  405,769
  435,085
  465,550
  497,216
  530,141
  564,385
  600,019
  637,113
Debt-to-equity ratio
  1.269
  3.160
  3.660
  4.030
  4.310
  4.520
  4.680
  4.810
  4.910
  4.990
  5.050
  5.100
  5.150
  5.190
  5.220
  5.240
  5.270
  5.290
  5.300
  5.320
  5.330
  5.350
  5.360
  5.370
  5.370
  5.380
  5.390
  5.400
  5.400
  5.410
  5.410
Adjusted equity ratio
  0.127
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154
  0.154

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  734
  2,436
  4,301
  6,501
  9,052
  11,962
  15,236
  18,874
  22,874
  27,230
  31,936
  36,996
  42,375
  48,080
  54,102
  60,436
  67,078
  74,027
  81,281
  88,843
  96,717
  104,909
  113,428
  122,285
  131,491
  141,061
  151,012
  161,362
  172,131
  183,340
  195,013
Depreciation, amort., depletion, $m
  851
  1,104
  1,404
  1,755
  2,159
  2,619
  3,134
  3,705
  4,332
  5,013
  5,749
  6,518
  7,357
  8,246
  9,185
  10,172
  11,206
  12,287
  13,416
  14,592
  15,817
  17,090
  18,414
  19,790
  21,219
  22,705
  24,250
  25,855
  27,526
  29,263
  31,073
Funds from operations, $m
  1,372
  3,540
  5,704
  8,256
  11,211
  14,580
  18,370
  22,579
  27,206
  32,244
  37,684
  43,514
  49,732
  56,326
  63,287
  70,607
  78,284
  86,314
  94,697
  103,435
  112,533
  121,999
  131,842
  142,074
  152,710
  163,766
  175,262
  187,217
  199,656
  212,603
  226,086
Change in working capital, $m
  68
  311
  371
  434
  500
  569
  638
  707
  776
  844
  910
  975
  1,039
  1,101
  1,161
  1,221
  1,280
  1,338
  1,397
  1,456
  1,515
  1,576
  1,638
  1,703
  1,769
  1,839
  1,911
  1,987
  2,067
  2,151
  2,239
Cash from operations, $m
  1,304
  3,229
  5,334
  7,822
  10,711
  14,012
  17,732
  21,872
  26,430
  31,400
  36,774
  42,539
  48,694
  55,225
  62,125
  69,386
  77,004
  84,976
  93,300
  101,979
  111,018
  120,423
  130,204
  140,372
  150,941
  161,928
  173,351
  185,230
  197,589
  210,453
  223,847
Maintenance CAPEX, $m
  0
  -834
  -1,085
  -1,385
  -1,736
  -2,140
  -2,600
  -3,115
  -3,686
  -4,313
  -4,994
  -5,730
  -6,518
  -7,357
  -8,246
  -9,185
  -10,172
  -11,206
  -12,287
  -13,416
  -14,592
  -15,817
  -17,090
  -18,414
  -19,790
  -21,219
  -22,705
  -24,250
  -25,855
  -27,526
  -29,263
New CAPEX, $m
  -894
  -3,325
  -3,953
  -4,631
  -5,338
  -6,065
  -6,801
  -7,540
  -8,274
  -8,997
  -9,707
  -10,401
  -11,078
  -11,740
  -12,388
  -13,024
  -13,652
  -14,276
  -14,899
  -15,526
  -16,162
  -16,810
  -17,475
  -18,161
  -18,872
  -19,613
  -20,386
  -21,196
  -22,046
  -22,940
  -23,881
Cash from investing activities, $m
  -1,317
  -4,159
  -5,038
  -6,016
  -7,074
  -8,205
  -9,401
  -10,655
  -11,960
  -13,310
  -14,701
  -16,131
  -17,596
  -19,097
  -20,634
  -22,209
  -23,824
  -25,482
  -27,186
  -28,942
  -30,754
  -32,627
  -34,565
  -36,575
  -38,662
  -40,832
  -43,091
  -45,446
  -47,901
  -50,466
  -53,144
Free cash flow, $m
  -13
  -929
  295
  1,806
  3,637
  5,807
  8,331
  11,217
  14,470
  18,090
  22,073
  26,408
  31,098
  36,128
  41,491
  47,178
  53,181
  59,494
  66,114
  73,037
  80,264
  87,797
  95,639
  103,797
  112,279
  121,095
  130,259
  139,785
  149,688
  159,988
  170,703
Issuance/(repayment) of debt, $m
  2,779
  4,360
  5,195
  6,085
  7,015
  7,970
  8,938
  9,909
  10,873
  11,824
  12,756
  13,668
  14,558
  15,428
  16,279
  17,115
  17,940
  18,760
  19,579
  20,403
  21,239
  22,090
  22,964
  23,866
  24,801
  25,774
  26,790
  27,854
  28,971
  30,146
  31,382
Issuance/(repurchase) of shares, $m
  116
  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  
  2,615
  4,360
  5,195
  6,085
  7,015
  7,970
  8,938
  9,909
  10,873
  11,824
  12,756
  13,668
  14,558
  15,428
  16,279
  17,115
  17,940
  18,760
  19,579
  20,403
  21,239
  22,090
  22,964
  23,866
  24,801
  25,774
  26,790
  27,854
  28,971
  30,146
  31,382
Total cash flow (excl. dividends), $m
  2,602
  3,431
  5,490
  7,892
  10,652
  13,777
  17,269
  21,126
  25,343
  29,914
  34,829
  40,076
  45,656
  51,556
  57,770
  64,293
  71,121
  78,254
  85,693
  93,441
  101,503
  109,887
  118,603
  127,663
  137,079
  146,869
  157,049
  167,639
  178,659
  190,133
  202,085
Retained Cash Flow (-), $m
  -252
  -792
  -946
  -1,108
  -1,277
  -1,451
  -1,627
  -1,804
  -1,979
  -2,152
  -2,322
  -2,488
  -2,650
  -2,808
  -2,963
  -3,115
  -3,266
  -3,415
  -3,564
  -3,714
  -3,866
  -4,021
  -4,180
  -4,344
  -4,515
  -4,692
  -4,877
  -5,070
  -5,274
  -5,487
  -5,713
Prev. year cash balance distribution, $m
 
  2,830
  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
 
  5,468
  4,545
  6,784
  9,375
  12,326
  15,642
  19,322
  23,364
  27,761
  32,507
  37,588
  43,006
  48,748
  54,807
  61,177
  67,855
  74,839
  82,129
  89,727
  97,637
  105,866
  114,423
  123,318
  132,565
  142,177
  152,172
  162,568
  173,385
  184,646
  196,372
Discount rate, %
 
  5.60
  5.88
  6.17
  6.48
  6.81
  7.15
  7.50
  7.88
  8.27
  8.69
  9.12
  9.58
  10.06
  10.56
  11.09
  11.64
  12.22
  12.84
  13.48
  14.15
  14.86
  15.60
  16.38
  17.20
  18.06
  18.96
  19.91
  20.91
  21.95
  23.05
PV of cash for distribution, $m
 
  5,178
  4,054
  5,668
  7,292
  8,868
  10,337
  11,643
  12,736
  13,575
  14,131
  14,389
  14,350
  14,026
  13,443
  12,636
  11,650
  10,536
  9,343
  8,122
  6,919
  5,772
  4,713
  3,764
  2,938
  2,240
  1,666
  1,207
  852
  585
  390
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

Tesoro Corporation, through its subsidiaries, operates as an independent petroleum refining, logistics, and marketing company in the United States. The company operates through three segments: Refining, TLLP, and Marketing. The Refining segment refines crude oil and other feed stocks into transportation fuels, such as gasoline and gasoline blend stocks, jet fuel, and diesel fuel, as well as other products, including heavy fuel oils, liquefied petroleum gas, petroleum coke, calcined coke, and asphalt. This segment also sells refined products in the bulk market principally to independent unbranded distributors, other refining and marketing companies, utilities, railroads, airlines, marine, and industrial end-users in the western United States. It owns and operates 7 petroleum refineries with a combined crude oil capacity of approximately 895 thousand barrels per day. The TLLP segment owns and operates a network of approximately 650 miles of crude oil, natural gas, and produced water gathering pipelines; and natural gas processing and fractionation complexes. The Marketing segment sells gasoline and diesel fuel through retail stations, as well as through third-party dealers and distributors. This segment operates a network of 2,492 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline, Rebel, Thrifty, and Tesoro brands. The company was formerly known as Tesoro Petroleum Corporation and changed its name to Tesoro Corporation in November 2004. Tesoro Corporation was founded in 1968 and is headquartered in San Antonio, Texas.

FINANCIAL RATIOS  of  Tesoro (TSO)

Valuation Ratios
P/E Ratio 15.9
Price to Sales 0.5
Price to Book 2.1
Price to Tangible Book
Price to Cash Flow 8.9
Price to Free Cash Flow 28.4
Growth Rates
Sales Growth Rate -14.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -13.2%
Cap. Spend. - 3 Yr. Gr. Rate 9.4%
Financial Strength
Quick Ratio 7
Current Ratio 0.2
LT Debt to Equity 118.4%
Total Debt to Equity 126.9%
Interest Coverage 7
Management Effectiveness
Return On Assets 4.7%
Ret/ On Assets - 3 Yr. Avg. 7%
Return On Total Capital 6.8%
Ret/ On T. Cap. - 3 Yr. Avg. 11.6%
Return On Equity 13.7%
Return On Equity - 3 Yr. Avg. 21.6%
Asset Turnover 1.3
Profitability Ratios
Gross Margin 19.8%
Gross Margin - 3 Yr. Avg. 18.9%
EBITDA Margin 9.5%
EBITDA Margin - 3 Yr. Avg. 9.1%
Operating Margin 6%
Oper. Margin - 3 Yr. Avg. 6.6%
Pre-Tax Margin 5.2%
Pre-Tax Margin - 3 Yr. Avg. 6%
Net Profit Margin 3%
Net Profit Margin - 3 Yr. Avg. 3.5%
Effective Tax Rate 33.4%
Eff/ Tax Rate - 3 Yr. Avg. 35.5%
Payout Ratio 33.9%

TSO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TSO stock intrinsic value calculation we used $24582 million for the last fiscal year's total revenue generated by Tesoro. The default revenue input number comes from 2016 income statement of Tesoro. 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 TSO stock valuation model: a) initial revenue growth rate of 30.1% 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 5.6%, whose default value for TSO is calculated based on our internal credit rating of Tesoro, 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 Tesoro.
    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 TSO stock the variable cost ratio is equal to 67.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $6695 million in the base year in the intrinsic value calculation for TSO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.6% for Tesoro.

Corporate tax rate of 27% is the nominal tax rate for Tesoro. 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 TSO 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 TSO are equal to 44.8%.

Life of production assets of 13.2 years is the average useful life of capital assets used in Tesoro 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 TSO is equal to 4.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5465 million for Tesoro - 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 112.804 million for Tesoro 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 Tesoro at the current share price and the inputted number of shares is $11.2 billion.

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Stock chart of TSO Financial statements of TSO
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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