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Abbott Laboratories: valuation update

|Includes: Abbott Laboratories (ABT)

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:
Year FCF $Millions
2000 2064
2001 2403
2002 2887
2003 2500
2004 3116
2005 3967
2006 3991
2007 3528
2008 6056
2009 6186
2010 7721
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
Year FCF $ Millions
0 7721
1 8107
2 8512
3 8938
4 9385
5 9854
Terminal Value 163604
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.