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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Abbott Laboratories: valuation update 2 comments
    Feb 27, 2011 11:12 PM | about stocks: ABT
    Abbott Laboratories ($ABT) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted January 31.  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:
    YearFCF $Millions
    20002064
    20012403
    20022887
    20032500
    20043116
    20053967
    20063991
    20073528
    20086056
    20096186
    20107721
    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
    YearFCF $ Millions
    07721
    18107
    28512
    38938
    49385
    59854
    Terminal Value163604
     
    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: ABT
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Comments (2)
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  • stemcellcure
    , contributor
    Comments (50) | Send Message
     
    I like ABT and many of the pharmas in general are undervalued, but be aware that ABT lacks diversification away from the cardiovascular space. Given the stunning results for Cephalon's cardiac stem cell drug just published in Nature, ABT's moat could quickly start to look like a kiddie pool. Revascor reduced MACE (Major Adverse Cardiac Events : chest pain, heart attack, death, etc) by an unprecedented 84%, virtually curing heart disease with a single injection. One unfortunate side effect, however, is increased risk of heart attack in ABT investors. If you can afford it, the drug has already been approved for treatment in Australia. bit.ly/i1pYmr
    28 Feb 2011, 01:15 AM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Curing heart disease with a single injection would be miraculous. Thanks for the link to the Cephalon info.
    28 Feb 2011, 02:07 AM Reply Like
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