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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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  • Cardinal Health Inc: Cash Flow Valuation Update 0 comments
    Aug 23, 2012 4:57 PM | about stocks: 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

    (click to enlarge)

    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


    Yahoo! Finance

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

    Stocks: CAH
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