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Stryker Corporation: SYK Cash Flow Valuation

June 28, 2011 | About:
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Eric Cota

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Stryker develops, manufactures and markets medical devices and equipment for use primarily in orthopedic procedures. The firm generates most of its revenue from reconstructive implants, such as knees and hips, but serves a variety of other orthopedic niches, including spine. Beyond implants, Stryker offers a wide range of operating room equipment, tools for orthopedic and other procedures, hospital beds and stretchers.

I estimated the firm's WACC today at 11.29% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:



Year


FCF $Millions


2001


306


2002


365


2003


504


2004


406


2005


592


2006


650


2007


841


2008


1021


2009


1329


2010


1365


Average Annual Growth FCF: ~ 20%

CAGR FCF: ~ 18%

Consensus Forecast Industry Five-Year Growth: ~ 16% per year

Consensus Forecast Company Five-Year Growth: ~ 11% per year

Assuming the company achieves a five-year growth rate in FCF of 11% 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


1365


1


1515


2


1682


3


1867


4


2072


5


2300


Terminal Value


22613


The firm's future cash flows, discounted at a WACC of 11.29%, give a present value for the entire firm (Debt + Equity) of $20.017 million. If the firm's fair value of debt is estimated at $1025 million, then the fair value of the firm's equity could be $18.992 million. $18.992 million / 388 million outstanding shares is ~ $49 per share, and a 20% margin of safety is ~ $39 per share.

About the author:

Eric Cota
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