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 |
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 |
$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.
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