Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Stryker Corporation: Cash Flow Valuation Update

|Includes:Stryker Corporation (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