Projected Yield: ~ 2.09%
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.
I estimated the firm's WACC today at 6.71% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
|
Year
|
FCF
$Millions
|
|
2002
|
699
|
|
2003
|
975
|
|
2004
|
2215
|
|
2005
|
2279
|
|
2006
|
1697
|
|
2007
|
866
|
|
2008
|
1136
|
|
2009
|
1034
|
|
2010
|
1878
|
|
2011
|
1103
|
|
TTM
|
1408
|
Average Annual Growth FCF: ~ 18%
CAGR FCF: ~ 5%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 12% per year
Starting at $1103 million FCF, assuming the company achieves a 5-year growth rate in FCF of 4.5% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
1103
|
1
|
1153
|
2
|
1205
|
3
|
1259
|
4
|
1315
|
5
|
1375
|
Terminal
Value
|
21420
|
The firm's future cash flows, discounted at a WACC of 6.71%, give a present value for the entire firm (Debt + Equity) of $20666 million. If the firm's fair value of debt is estimated at $3000 million, then the fair value of the firm's equity could be $17666 million. $17666 million / 346 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.
Sources
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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