Current Price: ~ $59/share

Yield: ~ 2.24%

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.

Estimated WACC for the firm today is 8.01% 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 | 345 |

2003 | 636 |

2004 | 822 |

2005 | 1106 |

2006 | 1657 |

2007 | 1613 |

2008 | 1561 |

2009 | 1895 |

2010 | 2040 |

2011 | 1857 |

TTM | 2115 |

Average Annual Growth FCF: ~ 24%

CAGR FCF: ~ 21%

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

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ 9%

Sustainable Growth Rate: ~ 30%

**Scenario 1**

Average FCF (2011, 2010, 2009) is $1931 million

- Start at $1931 million FCF
- Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1931 |

1 | 2085 |

2 | 2252 |

3 | 2433 |

4 | 2627 |

5 | 2837 |

Terminal Value | 38252 |

The firm's future free cash flows, discounted at a WACC of 8.01%, give a present value for the entire firm (Debt + Equity) of $35673 million. If the firm's fair value of debt is estimated at $6577 million, then the fair value of the firm's equity could be $29096 million. $29096 million / 547 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 8% per year, then 2.40% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1931 |

1 | 2085 |

2 | 2252 |

3 | 2433 |

4 | 2627 |

5 | 2837 |

Terminal Value | 54614 |

- Present Value of the entire firm (Debt + Equity): $46803 million
- Value of Equity: $40226 million or $74/share
- 20% margin of safety is $59/share

Sources

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