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Abbott Laboratories offers value with a margin of safety

Jan. 31, 2011 11:02 PM ETABT
Eric Cota profile picture
Eric Cota's Blog
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I believe ABT, at approximately $45/share offers value with a margin of safety on a cash flow valuation basis.

Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional health-care products. Products include prescription drugs, coronary and carotid stents, and nutritional liquids for infants and adults. Following the Advanced Medical Optics acquisition, Abbott also markets eye-care products. Abbott generates slightly less than 60% of revenue from pharmaceuticals.
(Source: Morningstar.com)

I estimated the firm's WACC at 6.34% using the Capital Asset Pricing Model and the company's recent SEC filings but I'll assume ABT has a higher WACC of 8.60%.    
Recent free cash flows and noted growth rates: 
Year FCF $Millions
2000 2064
2001 2403
2002 2887
2003 2500
2004 3116
2005 3967
2006 3991
2007 3528
2008 6056
2009 6186
TTM 7283

Average Annual Growth: approx 15%
CAGR: approx. 13%
Consensus Forecast Industry 5-Year Growth: approx. 10% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year

Assuming the company achieves a lower 5-year growth rate of 5% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:

Discounted Cash Flow Valuation

Year FCF $ Millions
0 7283
1 7647
2 8030
3 8431
4 8853
5 9295
Terminal Value 113487

The firm's future cash flows, discounted at a WACC of 8.60%, give a present value for the entire firm (Debt + Equity) of $108,077 million. If the firm's fair value of debt is estimated at $20,000 million, then the fair value of the firm's equity could be $88,077 million.

$88,077 million / 1550 million outstanding shares is approx $57 per share. A 20% margin of safety from here is approx $45 so assuming all else at ABT meets my standard for good business, I'd buy it today for the long term at $45 or less.

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