I believe $CAH, at approximately $41/share, offers good value with a margin of safety.
Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark and Walgreen.
(Source: Morningstar.com)
Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark and Walgreen.
(Source: Morningstar.com)
I estimated the firm's WACC at 10.17% using the Capital Asset Pricing Model and the company's recent SEC filings. ValuePro has a baseline WACC calculator here and it calculates the firm's WACC at 7.48%. I'm going with the higher mark, 10.17%.
Recent free cash flows and noted growth rates:
Recent free cash flows and noted growth rates:
Year | FCF $Millions |
2000 | 531 |
2001 | 699 |
2002 | 975 |
2003 | 2215 |
2004 | 2279 |
2005 | 1697 |
2006 | 866 |
2007 | 1136 |
2008 | 1034 |
2009 | 1878 |
TTM | 1664 |
Average Annual Growth: approx 26%
CAGR: approx. 15%
Internal Growth Rate: approx. 2%
Sustainable Growth Rate: approx. 6%
Consensus Forecast Industry 5-Year Growth: approx. 16% per year
Consensus Forecast Company 5-Year Growth: approx. 13% per year
CAGR: approx. 15%
Internal Growth Rate: approx. 2%
Sustainable Growth Rate: approx. 6%
Consensus Forecast Industry 5-Year Growth: approx. 16% per year
Consensus Forecast Company 5-Year Growth: approx. 13% per year
Assume the company achieves a lower 5-year growth rate of 5% per year, and 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 | 1664 |
1 | 1747 |
2 | 1835 |
3 | 1926 |
4 | 2023 |
5 | 2124 |
Terminal Value | 21932 |
The firm's future cash flows, discounted at a WACC of 10.17%, give a present value for the entire firm (Debt + Equity) of $20,735 million. If the firm's fair value of debt is estimated at $2,322 million, then the fair value of the firm's equity could be $18,413 million.
$18,413 million / 349 million outstanding shares = $52.76 per share. A 20% margin of safety from here is approx $42 per share and $CAH's current share price is approx $41. I believe $CAH currently offers good value with a margin of safety for the long term on a cash flow valuation basis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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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