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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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  • Medtronic Inc: Cash Flow Valuation Update 0 comments
    Jul 11, 2012 8:11 PM | about stocks: MDT

    Current Price: ~ $38/share
    Projected Yield: ~ 2.74%

    One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 41% of the company's total sales.

    Estimated WACC for the firm today is 8.86% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20031698
    20042421
    20052367
    2006963
    20072285
    20082883
    20093215
    20103496
    20113193
    20123971

    Average Annual Growth FCF: ~ 20%

    CAGR FCF: ~ 10%
    Consensus Forecast Industry 5-Year Growth: ~ 18% per year

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

    Internal Growth Rate: ~ 9%

    Sustainable Growth Rate: ~ 19%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $3553 million

    • Start at $3553 million FCF
    • Assume a 5-year growth rate in FCF of 5% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    03553
    13731
    23917
    34113
    44319
    54535
    Terminal Value53712

    The firm's future cash flows, discounted at a WACC of 8.86%, give a present value for the entire firm (Debt + Equity) of $51087 million. If the firm's fair value of debt is estimated at $9965 million, then the fair value of the firm's equity could be $41122 million. $41122 million / 1030 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 8% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    03553
    13837
    24144
    34476
    44834
    55221
    Terminal Value63603
    • Present Value of the entire firm (Debt + Equity): $58942 million
    • Value of Equity: $48977 million or $48/share
    • 20% margin of safety is $38/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Medtronic.com

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

    Stocks: MDT
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