Cardinal Health Inc: $CAH Cash Flow Valuation Update

Current Price: ~ $40/share
Yield: ~ 2.23%


Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark, and Walgreen.     

Estimated WACC for the firm today is 6.53% 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	975
2004	2215
2005	2279
2006	1697
2007	866
2008	1136
2009	1034
2010	1878
2011	1103
2012	913

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ -1%

Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 3%

Sustainable Growth Rate: ~ 14%

Scenario 1

• Start at $913 million FCF
• Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	913
1	1004
2	1105
3	1215
4	1337
5	1470
Terminal Value	24767

The firm's future free cash flows, discounted at a WACC of 6.53%, give a present value for the entire firm (Debt + Equity) of $23082 million. If the firm's fair value of debt is estimated at $3075 million, then the fair value of the firm's equity could be $20007 million.  $20007 million / 345 million outstanding shares is approximately $58 per share and a 20% margin of safety is $46/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 3.50% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	913
1	945
2	978
3	1012
4	1048
5	1084
Terminal Value	17185

• Present Value of the entire firm (Debt + Equity): $16715 million
• Value of Equity: $13640 million or $40/share
• 20% margin of safety is $32/share

Sources

Morningstar.com

Yahoo! Finance

Cardinalhealth.com

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

Cardinal Health Inc: $CAH cash flow valuation update

Current Price: ~ $41/share
Projected Yield: ~ 2.09%



Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark and Walgreen.  

I estimated the firm's WACC today at 6.71% 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	699
2003	975
2004	2215
2005	2279
2006	1697
2007	866
2008	1136
2009	1034
2010	1878
2011	1103
TTM	1408

Average Annual Growth FCF: ~ 18%

CAGR FCF: ~ 5%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Starting at $1103 million FCF, assuming the company achieves a 5-year growth rate in FCF of 4.5% 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	1103
1	1153
2	1205
3	1259
4	1315
5	1375
Terminal Value	21420

The firm's future cash flows, discounted at a WACC of 6.71%, give a present value for the entire firm (Debt + Equity) of $20666 million. If the firm's fair value of debt is estimated at $3000 million, then the fair value of the firm's equity could be $17666 million.  $17666 million / 346 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.

Sources

Morningstar.com

Yahoo! Finance

Cardinalhealth.com

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

David Einhorn likes Cardinal Health

David Einhorn and Greenlight Capital's New Stock Purchases (Insider Monkey)

Does Cardinal Health ($CAH) offer good long term value?

Cardinal Health offers good long term value with a margin of safety

I believe $CAH, at approximately $41/share, offers good value with a margin of safety.

Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark and Walgreen.
(Source: Morningstar.com)

I estimated the firm's WACC at 10.17% using the Capital Asset Pricing Model and the company's recent SEC filings.  ValuePro has a baseline WACC calculator here and it calculates the firm's WACC at 7.48%.  I'm going with the higher mark, 10.17%.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2000	531
2001	699
2002	975
2003	2215
2004	2279
2005	1697
2006	866
2007	1136
2008	1034
2009	1878
TTM	1664

Average Annual Growth: approx 26%
CAGR: approx. 15%
Internal Growth Rate: approx. 2%
Sustainable Growth Rate: approx. 6%
Consensus Forecast Industry 5-Year Growth: approx. 16% per year
Consensus Forecast Company 5-Year Growth: approx. 13% per year

Assume the company achieves a lower 5-year growth rate of 5% per year, and 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	1664
1	1747
2	1835
3	1926
4	2023
5	2124
Terminal Value	21932

The firm's future cash flows, discounted at a WACC of 10.17%, give a present value for the entire firm (Debt + Equity) of $20,735 million. If the firm's fair value of debt is estimated at $2,322 million, then the fair value of the firm's equity could be $18,413 million.

$18,413 million / 349 million outstanding shares = $52.76 per share. A 20% margin of safety from here is approx $42 per share and $CAH's current share price is approx $41.  I believe $CAH currently offers good value with a margin of safety for the long term on a cash flow valuation basis.

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