Projected Yield: ~ 2.50%
One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.
I estimated the firm's WACC today at 8.27% 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 | 1204 |
| 2003 | 1698 |
| 2004 | 2421 |
| 2005 | 2367 |
| 2006 | 963 |
| 2007 | 2285 |
| 2008 | 2883 |
| 2009 | 3215 |
| 2010 | 3496 |
| 2011 | 3193 |
| TTM | 3713 |
Average Annual Growth FCF: ~ 22%
CAGR FCF: ~11%
Consensus Forecast Industry 5-Year Growth: ~ 16% per yearConsensus Forecast Company 5-Year Growth: ~ 7% per year
Starting at $3193 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% 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 | 3193 |
| 1 | 3417 |
| 2 | 3656 |
| 3 | 3912 |
| 4 | 4185 |
| 5 | 4478 |
| Terminal Value | 57973 |
The firm's future cash flows, discounted at a WACC of 8.27%, give a present value for the entire firm (Debt + Equity) of $54388 million. If the firm's fair value of debt is estimated at $10300 million, then the fair value of the firm's equity could be $44088 million. $44088 million / 1060 million outstanding shares is approximately $42 per share and a 20% margin of safety is $33/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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