Projected Yield: ~ 2.67%
Baxter International focuses on delivering injectable therapies for a wide variety of medical conditions. The firm's BioScience segment specializes in developing treatments for disorders such as hemophilia and immune deficiencies. It also provides a variety of medication delivery systems including intravenous bags, solutions, and other devices to control fluid inflow, including dialysis equipment and solutions for patients with kidney failure.
I estimated the firm's WACC today at 6.18% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF
$Millions
|
2001
|
362
|
2002
|
345
|
2003
|
636
|
2004
|
822
|
2005
|
1106
|
2006
|
1657
|
2007
|
1613
|
2008
|
1561
|
2009
|
1895
|
2010
|
2040
|
TTM
|
1953
|
Average Annual Growth FCF: ~ 24%
CAGR FCF: ~ 21%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Scenario 1
The company's FCF through 9 months ending 9/30/2011 is $1282 million; $1709 million annualized. Starting at $1709 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% 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
|
1709
|
1
|
1880
|
2
|
2068
|
3
|
2275
|
4
|
2502
|
5
|
2752
|
Terminal
Value
|
48980
|
The firm's future cash flows, discounted at a WACC of 6.18%, give a present value for the entire firm (Debt + Equity) of $45802 million. If the firm's fair value of debt is estimated at $5600 million, then the fair value of the firm's equity could be $40202 million. $40202 million / 564 million outstanding shares is approximately $71 per share and a 20% margin of safety is $57/share.
Scenario 2
All else being equal and assuming the company achieves a 5-year growth rate in FCF of 8% per year, then after the next 5 years, no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
1709
|
1
|
1846
|
2
|
1993
|
3
|
2153
|
4
|
2325
|
5
|
2511
|
Terminal
Value
|
43874
|
The firm's future cash flows, discounted at a WACC of 6.18%, give a present value for the entire firm (Debt + Equity) of $41500 million. If the firm's fair value of debt is estimated at $5600 million, then the fair value of the firm's equity could be $35900 million. $35900 million / 564 million outstanding shares is approximately $64 per share and a 20% margin of safety is $51/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
