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

Morningstar.com

Yahoo! Finance

Abbott Laboratories

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Abbott Laboratories: $ABT valuation update

Abbott Laboratories ($ABT) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted January 14.  This update incorporates the firm's year-end 2010 data.  I believe $ABT is undervalued now at $48/share and fairly valued at $89/share on a cash flow valuation basis.    


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.

I estimated the firm's WACC today at 6.32% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2000	2064
2001	2403
2002	2887
2003	2500
2004	3116
2005	3967
2006	3991
2007	3528
2008	6056
2009	6186
2010	7721

Average Annual Growth: approx 16%
CAGR: approx. 14%

Consensus Forecast Industry 5-Year Growth: approx. 12% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year

Assuming the company achieves a 5-year growth rate in FCF of 5% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	7721
1	8107
2	8512
3	8938
4	9385
5	9854
Terminal Value	163604

The firm's future cash flows, discounted at a WACC of 6.32%, give a present value for the entire firm (Debt + Equity) of $157,587 million. If the firm's fair value of debt is estimated at $20,000 million, then the fair value of the firm's equity could be $137,587 million.  $137,587 million / 1550 million outstanding shares is approximately $89 per share and a 20% margin of safety is $71/share.

All else being equal and assuming a higher WACC of 9.00%, the fair value for $ABT is $58/share and a 20% margin of safety is $46/share.

Sources
Morningstar.com

Abbott.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Abbott Labs - Cash flow valuation

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.
Source: Morningstar.com

I estimated the firm's WACC at 6.29% using the Capital Asset Pricing Model and information gleamed from the company's recent SEC filings.  Assuming I missed the mark on my estimate, factor in a margin of safety and estimate the firm's WACC higher at 8.00%.

Recent free cash flows and noted growth rates

Year	FCF $Millions
2000	2064
2001	2403
2002	2887
2003	2500
2004	3116
2005	3967
2006	3991
2007	3528
2008	6056
2009	6186
TTM	7283

Average Annual Growth Rate: approx 15%
CAGR: approx 13%
Internal Growth Rate: approx 8%
Sustainable Growth Rate: approx 20%
Consensus Forecast Industry 5-Year Growth Rate: approx 13% per year
Consensus Forecast Company 5-Year Growth Rate: approx 10% per year


Assuming the forecast company 5-year growth rate of 10% per year is too high, factor in a margin of safety and assume a lower growth rate of 5% per year. Furthermore, assume that after the next five years, the company achieves no growth or 0% growth per year forever.


Discounted Cash Flow Valuation

Year	FCF $ Millions
0	7283
1	7647
2	8030
3	8431
4	8853
5	9295
Terminal Value	121999

The firm's future cash flows discounted at a WACC of 8.00% give a present value for the entire firm (Debt + Equity) of $116,521 million.  If the firm's fair value of all debt is estimated at $19,659 million, then the fair value of the firm's equity could be valued at $96,862 million.


$96,862 million / 1,550 million outstanding shares = $62.49 per share.  A 20% margin of safety here is $49.99 per share and $ABT's current share price is approx $47.  I like $ABT for the long term and consider it undervalued here.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.