Wednesday, February 29, 2012

International Business Machines: $IBM Cash Flow Valuation Update


Current Price: ~ $197/share
Projected Yield: ~ 1.52%


IBM is one of the largest information technology companies with an array of offerings, including system hardware, infrastructure software, outsourcing, and systems integration services. The firm has operations in more than 170 countries and generates about 65% of revenue from abroad.           


Estimated WACC for the firm today is 6.86% 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
8313
2003
10014
2004
10955
2005
11072
2006
9841
2007
10584
2008
14641
2009
17326
2010
15364
2011
15738


Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
Internal Growth Rate: ~ 12%
Sustainable Growth Rate: ~ 133%

Scenario 1
  • Start at $15738 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
15738
1
17469
2
19391
3
21524
4
23891
5
26519
Terminal Value
428835



The firm's future cash flows, discounted at a WACC of 6.86%, give a present value for the entire firm (Debt + Equity) of $396011 million. If the firm's fair value of debt is estimated at $27161 million, then the fair value of the firm's equity could be $368850 million.  $368850 million / 1160 million outstanding shares is approximately $318 per share and a 20% margin of safety is $254/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
15738
1
16682
2
17683
3
18744
4
19869
5
21061
Terminal Value
325228


  • Present Value of the entire firm (Debt + Equity): $310160 million
  • Value of Equity: $282999 million or $244/share
  • 20% margin of safety is $195/share



Scenario 3
All else being equal,
  • Discount the firm's future FCFs at 8%
  • Assume a 5-year growth rate in FCF of 6% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
15738
1
16682
2
17683
3
18744
4
19869
5
21061
Terminal Value
279058


  • Present Value of the entire firm (Debt + Equity): $264347 million
  • Value of Equity: $237186 million or $204/share
  • 20% margin of safety is $163/share


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

Tuesday, February 28, 2012

Stryker Corporation: $SYK Cash Flow Valuation Update


Current Price: ~ $55/share
Projected Yield: ~ 1.55%



Stryker develops, manufactures, and markets medical devices and equipment for use primarily in orthopedic procedures. The firm generates most of its revenue from reconstructive implants, such as knees and hips, but serves a variety of other orthopedic niches, including spine. Beyond implants, Stryker offers a wide range of operating room equipment, tools for orthopedic and other procedures, hospital beds, and stretchers.           


Estimated WACC for the firm today is 9.88% 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
365
2003
504
2004
406
2005
592
2006
650
2007
841
2008
1021
2009
1329
2010
1365
2011
1208


Average Annual Growth FCF: ~ 16%
CAGR FCF: ~ 14%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
Internal Growth Rate: ~ 10%
Sustainable Growth Rate: ~ 17%

Scenario 1
Average FCF (2011, 2010, 2009) is $1301 million
  • Start at $1301 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1301
1
1444
2
1603
3
1779
4
1975
5
2192
Terminal Value
24629



The firm's future cash flows, discounted at a WACC of 9.88%, give a present value for the entire firm (Debt + Equity) of $22083 million. If the firm's fair value of debt is estimated at $1837 million, then the fair value of the firm's equity could be $20246 million.  $20246 million / 381 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 11% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1301
1
1444
2
1603
3
1779
4
1975
5
2192
Terminal Value
35368


  • Present Value of the entire firm (Debt + Equity): $28787 million
  • Value of Equity: $26950 million or $71/share
  • 20% margin of safety is $57/share



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

Johnson & Johnson: $JNJ Cash Flow Update


Current Price: ~ $65/share
Projected Yield: ~ 3.54%



Johnson & Johnson ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents close to 36% of total sales, we expect patent losses and the Synthes acquisition to reduce this proportion to approximately 27% during the next 10 years, with the device segment picking up the majority of the share.           


Estimated WACC for the firm today is 7.16% 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
6077
2003
8333
2004
8956
2005
9245
2006
11510
2007
11939
2008
11906
2009
14206
2010
14001
2011
11405


Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 7% per year
Consensus Forecast Company 5-Year Growth: ~ 6% per year
Internal Growth Rate: ~ 3%
Sustainable Growth Rate: ~ 6%

Scenario 1
Average FCF (2011, 2010) is $12703 million
  • Start at $12703 million FCF
  • Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
12703
1
13465
2
14273
3
15129
4
16037
5
16999
Terminal Value
251581



The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $239496 million. If the firm's fair value of debt is estimated at $15585 million, then the fair value of the firm's equity could be $223911 million.  $223911 million / 2750 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 2% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
12703
1
12957
2
13216
3
13481
4
13750
5
14025
Terminal Value
199730


  • Present Value of the entire firm (Debt + Equity): $196233 million
  • Value of Equity: $180648 million or $66/share
  • 20% margin of safety is $53/share



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