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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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  • AmerisourceBergen Corp: Cash Flow Valuation Update 0 comments
    Jan 24, 2013 4:03 PM | about stocks: ABC

    Current Price: ~ $46/share
    Yield: ~ 1.30%

    AmerisourceBergen Corporation is a pharmaceutical services company providing drug distribution and related healthcare services and solutions to pharmacy, physician, and manufacturer customers, which are based mainly in the United States and Canada.

    Estimated WACC for the firm today is 6.88% 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 264
    2004 636
    2005 1323
    2006 694
    2007 1090
    2008 600
    2009 638
    2010 924
    2011 1000
    2012 1141

    (click to enlarge)

    Average Annual Growth FCF: ~ 32%

    CAGR FCF: ~ 18%
    Consensus Forecast Industry 5-Year Growth: ~ 16% per year

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

    Internal Growth Rate: ~ 4%

    Sustainable Growth Rate: ~ 28%

    Scenario 1
    Average FCF (past five years) is $861 million

    • Start at $861 million FCF
    • Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 861
    1 964
    2 1080
    3 1210
    4 1355
    5 1517
    Terminal Value 24684

    The firm's future free cash flows, discounted at a WACC of 6.88%, give a present value for the entire firm (Debt + Equity) of $22658 million. If the firm's fair value of debt is estimated at $1636 million, then the fair value of the firm's equity could be $21022 million. $21022 million / 235 million outstanding shares is approximately $89 per share and a 20% margin of safety is $71/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 4% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 861
    1 895
    2 931
    3 969
    4 1007
    5 1048
    Terminal Value 15824
    • Present Value of the entire firm (Debt + Equity): $15312 million
    • Value of Equity: $13676 million or $58/share
    • 20% margin of safety is $46/share

    Sources

    Morningstar.com

    Yahoo! Finance

    AmerisourceBergen

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

    Stocks: ABC
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