Microsoft Excel LibreOffice Calc

Abbott Laboratories (ABT)


Present Value of Free Cash Flow to the Firm (FCFF)

Difficulty: Intermediate


Intrinsic Stock Value (Valuation Summary)

Abbott Laboratories, free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.82%
01 FCFF0 5,645 
1 FCFF1 5,579  = 5,645  × (1 + -1.17%) 4,945 
2 FCFF2 5,659  = 5,579  × (1 + 1.44%) 4,447 
3 FCFF3 5,889  = 5,659  × (1 + 4.05%) 4,101 
4 FCFF4 6,281  = 5,889  × (1 + 6.67%) 3,878 
5 FCFF5 6,864  = 6,281  × (1 + 9.28%) 3,756 
5 Terminal value (TV5) 212,076  = 6,864  × (1 + 9.28%) ÷ (12.82%9.28%) 116,051 
Intrinsic value of Abbott Laboratories’s capital 137,178 
Less: Debt (fair value) 20,071 
Intrinsic value of Abbott Laboratories’s common stock 117,107 
Intrinsic value of Abbott Laboratories’s common stock (per share) $66.38
Current share price $87.49

Based on: 10-K (filing date: 2019-02-22).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Weighted Average Cost of Capital (WACC)

Abbott Laboratories, cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 154,348  0.88 14.14%
Debt (fair value) 20,071  0.12 2.66% = 3.37% × (1 – 21.14%)

Based on: 10-K (filing date: 2019-02-22).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,764,181,262 × $87.49 = $154,348,218,612.38

   Debt (fair value). See Details »

2 Required rate of return on equity is estimated by using CAPM. See Details »

   Required rate of return on debt. See Details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (12.50% + 18.70% + 24.80% + 18.10% + 31.60%) ÷ 5 = 21.14%

WACC = 12.82%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Abbott Laboratories, PRAT model

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Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Interest expense 826  904  431  163  150 
Net earnings from discontinued operations, net of taxes 34  124  337  1,817  563 
Net earnings 2,368  477  1,400  4,423  2,284 
Effective income tax rate (EITR)1 12.50% 18.70% 24.80% 18.10% 31.60%
Interest expense, after tax2 723  735  324  133  103 
Add: Cash dividends declared on common shares 2,047  1,947  1,547  1,464  1,363 
Interest expense (after tax) and dividends 2,770  2,682  1,871  1,597  1,466 
EBIT(1 – EITR)3 3,057  1,088  1,387  2,739  1,824 
Short-term borrowings 200  206  1,322  3,127  4,382 
Current portion of long-term debt 508  55 
Long-term debt, excluding current portion 19,359  27,210  20,681  5,871  3,408 
Total Abbott shareholders’ investment 30,524  30,897  20,538  21,211  21,526 
Total capital 50,090  58,821  42,544  30,212  29,371 
Ratios
Retention rate (RR)4 0.09 -1.47 -0.35 0.42 0.20
Return on invested capital (ROIC)5 6.10% 1.85% 3.26% 9.07% 6.21%
Averages
RR -0.22
ROIC 5.30%
Growth rate of FCFF (g)6 -1.17%

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-17), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-27).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 826 × (1 – 12.50%) = 723

3 EBIT(1 – EITR) = Net earnings – Net earnings from discontinued operations, net of taxes + Interest expense, after tax
= 2,36834 + 723 = 3,057

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,0572,770] ÷ 3,057 = 0.09

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,057 ÷ 50,090 = 6.10%

6 g = RR × ROIC
= -0.22 × 5.30% = -1.17%


FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (174,419 × 12.82%5,645) ÷ (174,419 + 5,645) = 9.28%

where:
Total capital, fair value0 = current fair value of Abbott Laboratories’s debt and equity (USD $ in millions)
FCFF0 = last year Abbott Laboratories’s free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Abbott Laboratories’s capital


FCFF growth rate (g) forecast

Abbott Laboratories, H-model

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Year Value gt
1 g1 -1.17%
2 g2 1.44%
3 g3 4.05%
4 g4 6.67%
5 and thereafter g5 9.28%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -1.17% + (9.28%-1.17%) × (2 – 1) ÷ (5 – 1) = 1.44%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -1.17% + (9.28%-1.17%) × (3 – 1) ÷ (5 – 1) = 4.05%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -1.17% + (9.28%-1.17%) × (4 – 1) ÷ (5 – 1) = 6.67%