Wednesday, July 11, 2012

Medtronic Inc: $MDT Cash Flow Valuation Update


Current Price: ~ $38/share
Projected Yield: ~ 2.74%


One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.

Estimated WACC for the firm today is 8.86% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2003
1698
2004
2421
2005
2367
2006
963
2007
2285
2008
2883
2009
3215
2010
3496
2011
3193
2012
3971






Average Annual Growth FCF: ~ 20%
CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 5% per year
Internal Growth Rate: ~ 9%
Sustainable Growth Rate: ~ 19%

Scenario 1
Average FCF (2012, 2011, 2010) is $3553 million
  • Start at $3553 million FCF
  • Assume a 5-year growth rate in FCF of 5% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
3553
1
3731
2
3917
3
4113
4
4319
5
4535
Terminal Value
53712

The firm's future cash flows, discounted at a WACC of 8.86%, give a present value for the entire firm (Debt + Equity) of $51087 million. If the firm's fair value of debt is estimated at $9965 million, then the fair value of the firm's equity could be $41122 million.  $41122 million / 1030 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 8% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
3553
1
3837
2
4144
3
4476
4
4834
5
5221
Terminal Value
63603

  • Present Value of the entire firm (Debt + Equity): $58942 million
  • Value of Equity: $48977 million or $48/share
  • 20% margin of safety is $38/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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