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AmerisourceBergen Corp: Cash Flow Valuation

Feb. 22, 2012 1:54 AM ET|Includes: AmerisourceBergen Corporation (ABC)

Current Price: ~ $36/share
Projected Yield: ~ 1.44%

AmerisourceBergen is one of three national pharmaceutical distributors. The company's activities include procurement, packaging, inventory management, reimbursement consulting, physician education, and logistics services. AmerisourceBergen is a leader in specialty distribution and is the largest distributor of oncology drugs in the United States.

Estimated WACC for the firm today is 8.02% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	472
2003	264
2004	636
2005	1323
2006	694
2007	1090
2008	600
2009	638
2010	924
2011	1000
TTM	1533

Average Annual Growth FCF: ~ 25%

CAGR FCF: ~ 9%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 13% per year

Internal Growth Rate: ~ 4%

Sustainable Growth Rate: ~ 25%

Scenario 1
Average FCF (2011, 2010, 2009) is $854 million

Start at $854 million FCF
Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	854
1	965
2	1090
3	1232
4	1392
5	1573
Terminal Value	22174

The firm's future cash flows, discounted at a WACC of 8.02%, give a present value for the entire firm (Debt + Equity) of $19977 million. If the firm's fair value of debt is estimated at $2079 million, then the fair value of the firm's equity could be $17898 million. $17898 million / 258 million outstanding shares is approximately $69 per share and a 20% margin of safety is $55/share.

Scenario 2
All else being equal,