Abbott Laboratories ($ABT) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted January 31. This update incorporates the firm's year-end 2010 data. I believe $ABT is undervalued now at $48/share and fairly valued at $89/share 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.
I estimated the firm's WACC today at 6.32% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Average Annual Growth: approx 16%
CAGR: approx. 14%
Consensus Forecast Industry 5-Year Growth: approx. 12% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
Assuming the company achieves a 5-year growth rate in FCF of 5% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
||FCF $ Millions
The firm's future cash flows, discounted at a WACC of 6.32%, give a present value for the entire firm (Debt + Equity) of $157,587 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 $137,587 million. $137,587 million / 1550 million outstanding shares is approximately $89 per share and a 20% margin of safety is $71/share.
All else being equal and assuming a higher WACC of 9.00%, the fair value for $ABT is $58/share and a 20% margin of safety is $46/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.