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:
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 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
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
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 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,
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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