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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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  • Cardinal Health Inc: cash flow valuation update 0 comments
    Jan 5, 2012 3:54 PM | about stocks: CAH
    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
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: CAH
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