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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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  • Baxter International Inc: cash flow valuation update 0 comments
    Jan 9, 2012 2:49 PM | about stocks: BAX
    Current Price: ~ $50/share
    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.


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