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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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  • Stryker Corporation: Cash Flow Valuation Update 0 comments
    Feb 28, 2012 2:00 PM | about stocks: SYK

    Current Price: ~ $55/share
    Projected Yield: ~ 1.55%

    Stryker develops, manufactures, and markets medical devices and equipment for use primarily in orthopedic procedures. The firm generates most of its revenue from reconstructive implants, such as knees and hips, but serves a variety of other orthopedic niches, including spine. Beyond implants, Stryker offers a wide range of operating room equipment, tools for orthopedic and other procedures, hospital beds, and stretchers.

    Estimated WACC for the firm today is 9.88% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2002 365
    2003 504
    2004 406
    2005 592
    2006 650
    2007 841
    2008 1021
    2009 1329
    2010 1365
    2011 1208

    Average Annual Growth FCF: ~ 16%

    CAGR FCF: ~ 14%
    Consensus Forecast Industry 5-Year Growth: ~ 18% per year

    Consensus Forecast Company 5-Year Growth: ~ 11% per year

    Internal Growth Rate: ~ 10%

    Sustainable Growth Rate: ~ 17%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $1301 million

    • Start at $1301 million FCF
    • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 1301
    1 1444
    2 1603
    3 1779
    4 1975
    5 2192
    Terminal Value 24629

    The firm's future cash flows, discounted at a WACC of 9.88%, give a present value for the entire firm (Debt + Equity) of $22083 million. If the firm's fair value of debt is estimated at $1837 million, then the fair value of the firm's equity could be $20246 million. $20246 million / 381 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 3% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 1301
    1 1444
    2 1603
    3 1779
    4 1975
    5 2192
    Terminal Value 35368
    • Present Value of the entire firm (Debt + Equity): $28787 million
    • Value of Equity: $26950 million or $71/share
    • 20% margin of safety is $57/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Stryker Corporation

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

    Stocks: SYK
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