Current Price: ~ $56/share
Projected Yield: ~ 3.41%
Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional healthcare 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 eyecare 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:
Average Annual Growth FCF: ~ 14%
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 5Year Growth: ~ 10% per year
Consensus Forecast Company 5Year Growth: ~ 9% per year
Internal Growth Rate: ~ 3%
Sustainable Growth Rate: ~ 8%
Scenario 1
Average FCF (2011, 2010, 2009) is $7129 million
Average FCF (2011, 2010, 2009) is $7129 million
 Start at $7129 million FCF
 Assume a 5year growth rate in FCF of 2% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
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.
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,
All else being equal,
 Assume a 5year 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,
All else being equal,
 Discount the firm's future FCFs at 7%
 Assume a 5year 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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