Abbott Labs - Cash flow valuation

Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional health-care products. Products include prescription drugs, coronary and carotid stents, and nutritional liquids for infants and adults. Following the Advanced Medical Optics acquisition, Abbott also markets eye-care products. Abbott generates slightly less than 60% of revenue from pharmaceuticals.
Source: Morningstar.com

I estimated the firm's WACC at 6.29% using the Capital Asset Pricing Model and information gleamed from the company's recent SEC filings.  Assuming I missed the mark on my estimate, factor in a margin of safety and estimate the firm's WACC higher at 8.00%.

Recent free cash flows and noted growth rates

Year	FCF $Millions
2000	2064
2001	2403
2002	2887
2003	2500
2004	3116
2005	3967
2006	3991
2007	3528
2008	6056
2009	6186
TTM	7283

Average Annual Growth Rate: approx 15%
CAGR: approx 13%
Internal Growth Rate: approx 8%
Sustainable Growth Rate: approx 20%
Consensus Forecast Industry 5-Year Growth Rate: approx 13% per year
Consensus Forecast Company 5-Year Growth Rate: approx 10% per year


Assuming the forecast company 5-year growth rate of 10% per year is too high, factor in a margin of safety and assume a lower growth rate of 5% per year. Furthermore, assume that after the next five years, the company achieves no growth or 0% growth per year forever.


Discounted Cash Flow Valuation

Year	FCF $ Millions
0	7283
1	7647
2	8030
3	8431
4	8853
5	9295
Terminal Value	121999

The firm's future cash flows discounted at a WACC of 8.00% give a present value for the entire firm (Debt + Equity) of $116,521 million.  If the firm's fair value of all debt is estimated at $19,659 million, then the fair value of the firm's equity could be valued at $96,862 million.


$96,862 million / 1,550 million outstanding shares = $62.49 per share.  A 20% margin of safety here is $49.99 per share and $ABT's current share price is approx $47.  I like $ABT for the long term and consider it undervalued here.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.