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.