Thursday, February 23, 2012

Abbott Laboratories: $ABT Cash Flow Valuation Update


Current Price: ~ $56/share
Projected Yield: ~ 3.41%



Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional health-care products. Products include prescription drugs, coronary and carotid stents, and nutritional liquids for infants and adults. Following the Advanced Medical Optics acquisition, Abbott also markets eye-care products. Abbott generates slightly less than 60% of revenue from pharmaceuticals.           


Estimated WACC for the firm today is 5.80% 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
2887
2003
2500
2004
3116
2005
3967
2006
3991
2007
3528
2008
6056
2009
6186
2010
7721
2011
7479



Average Annual Growth FCF: ~ 14%
CAGR FCF: ~ 11%
Consensus Forecast Industry 5-Year Growth: ~ 10% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 3%
Sustainable Growth Rate: ~ 8%

Scenario 1
Average FCF (2011, 2010, 2009) is $7129 million
  • Start at $7129 million FCF
  • Assume a 5-year growth rate in FCF of 2% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
7129
1
7272
2
7417
3
7565
4
7717
5
7871
Terminal Value
138492



The firm's future cash flows, discounted at a WACC of 5.80%, give a present value for the entire firm (Debt + Equity) of $136472 million. If the firm's fair value of debt is estimated at $17477 million, then the fair value of the firm's equity could be $118995 million.  $118995 million / 1560 million outstanding shares is approximately $76 per share and a 20% margin of safety is $61/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of -3% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
7129
1
6915
2
6708
3
6506
4
6311
5
6122
Terminal Value
102437


  • Present Value of the entire firm (Debt + Equity): $104963 million
  • Value of Equity: $87486 million or $56/share
  • 20% margin of safety is $45/share



Scenario 3
All else being equal,
  • Discount the firm's future FCFs at 7%
  • Assume a 5-year growth rate in FCF of 4.50% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
7129
1
7450
2
7785
3
8135
4
8501
5
8884
Terminal Value
132626


  • Present Value of the entire firm (Debt + Equity): $127783 million
  • Value of Equity: $110306 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.

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