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Cardinal Health Inc: Cash Flow Valuation Update

|Includes:Cardinal Health Inc. (CAH)

Current Price: ~ $40/share
Yield: ~ 2.23%

Cardinal Health is a leading distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. Its operations include procurement, packaging, inventory management, and logistics services. Its largest customers are CVS Caremark, and Walgreen.

Estimated WACC for the firm today is 6.53% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 975
2004 2215
2005 2279
2006 1697
2007 866
2008 1136
2009 1034
2010 1878
2011 1103
2012 913

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ -1%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 3%

Sustainable Growth Rate: ~ 14%

Scenario 1

  • Start at $913 million FCF
  • Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 913
1 1004
2 1105
3 1215
4 1337
5 1470
Terminal Value 24767

The firm's future free cash flows, discounted at a WACC of 6.53%, give a present value for the entire firm (Debt + Equity) of $23082 million. If the firm's fair value of debt is estimated at $3075 million, then the fair value of the firm's equity could be $20007 million. $20007 million / 345 million outstanding shares is approximately $58 per share and a 20% margin of safety is $46/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 3.50% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 913
1 945
2 978
3 1012
4 1048
5 1084
Terminal Value 17185
  • Present Value of the entire firm (Debt + Equity): $16715 million
  • Value of Equity: $13640 million or $40/share
  • 20% margin of safety is $32/share

Sources

Morningstar.com

Yahoo! Finance

Cardinalhealth.com

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

Stocks: CAH