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.

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