Intrinsic value of Abbott Laboratories - ABT

Previous Close

$49.81

  Intrinsic Value

$423.88

stock screener

  Rating & Target

str. buy

+751%

  Value-price divergence*

+67%

Previous close

$49.81

 
Intrinsic value

$423.88

 
Up/down potential

+751%

 
Rating

str. buy

 
Value-price divergence*

+67%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ABT stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 85.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.20
  29.70
  27.23
  25.01
  23.01
  21.21
  19.59
  18.13
  16.81
  15.63
  14.57
  13.61
  12.75
  11.98
  11.28
  10.65
  10.09
  9.58
  9.12
  8.71
  8.34
  8.00
  7.70
  7.43
  7.19
  6.97
  6.77
  6.60
  6.44
  6.29
  6.16
Revenue, $m
  20,853
  27,046
  34,411
  43,016
  52,913
  64,133
  76,694
  90,596
  105,828
  122,372
  140,201
  159,285
  179,596
  201,104
  223,786
  247,620
  272,594
  298,700
  325,940
  354,320
  383,859
  414,579
  446,512
  479,699
  514,185
  550,025
  587,279
  626,015
  666,307
  708,236
  751,887
Variable operating expenses, $m
 
  7,615
  9,480
  11,658
  14,163
  17,004
  20,184
  23,703
  27,559
  31,748
  36,261
  40,324
  45,466
  50,911
  56,653
  62,687
  69,009
  75,618
  82,514
  89,698
  97,176
  104,953
  113,037
  121,439
  130,169
  139,242
  148,673
  158,480
  168,680
  179,294
  190,345
Fixed operating expenses, $m
 
  12,205
  12,510
  12,823
  13,143
  13,472
  13,808
  14,154
  14,508
  14,870
  15,242
  15,623
  16,014
  16,414
  16,824
  17,245
  17,676
  18,118
  18,571
  19,035
  19,511
  19,999
  20,499
  21,011
  21,536
  22,075
  22,627
  23,192
  23,772
  24,367
  24,976
Total operating expenses, $m
  17,668
  19,820
  21,990
  24,481
  27,306
  30,476
  33,992
  37,857
  42,067
  46,618
  51,503
  55,947
  61,480
  67,325
  73,477
  79,932
  86,685
  93,736
  101,085
  108,733
  116,687
  124,952
  133,536
  142,450
  151,705
  161,317
  171,300
  181,672
  192,452
  203,661
  215,321
Operating income, $m
  3,185
  7,226
  12,422
  18,536
  25,606
  33,657
  42,701
  52,739
  63,761
  75,754
  88,698
  103,338
  118,117
  133,780
  150,309
  167,689
  185,909
  204,965
  224,855
  245,587
  267,171
  289,627
  312,976
  337,249
  362,479
  388,708
  415,979
  444,343
  473,855
  504,575
  536,567
EBITDA, $m
  4,538
  8,964
  14,423
  20,845
  28,270
  36,724
  46,218
  56,753
  68,322
  80,908
  94,490
  109,046
  124,552
  140,986
  158,328
  176,562
  195,677
  215,668
  236,535
  258,283
  280,926
  304,482
  328,976
  354,438
  380,904
  408,417
  437,023
  466,775
  497,731
  529,953
  563,509
Interest expense (income), $m
  181
  724
  1,048
  1,434
  1,885
  2,404
  2,993
  3,651
  4,380
  5,179
  6,047
  6,982
  7,982
  9,047
  10,175
  11,365
  12,614
  13,924
  15,293
  16,721
  18,209
  19,758
  21,369
  23,044
  24,784
  26,592
  28,472
  30,425
  32,456
  34,569
  36,768
Earnings before tax, $m
  1,413
  6,503
  11,374
  17,101
  23,721
  31,253
  39,709
  49,087
  59,381
  70,575
  82,651
  96,357
  110,134
  124,732
  140,134
  156,324
  173,295
  191,041
  209,562
  228,866
  248,962
  269,868
  291,607
  314,205
  337,695
  362,115
  387,507
  413,918
  441,399
  470,006
  499,799
Tax expense, $m
  350
  1,756
  3,071
  4,617
  6,405
  8,438
  10,721
  13,254
  16,033
  19,055
  22,316
  26,016
  29,736
  33,678
  37,836
  42,208
  46,790
  51,581
  56,582
  61,794
  67,220
  72,864
  78,734
  84,835
  91,178
  97,771
  104,627
  111,758
  119,178
  126,902
  134,946
Net income, $m
  1,400
  4,747
  8,303
  12,484
  17,316
  22,815
  28,987
  35,834
  43,348
  51,520
  60,335
  70,340
  80,398
  91,055
  102,298
  114,117
  126,505
  139,460
  152,980
  167,072
  181,742
  197,004
  212,873
  229,370
  246,518
  264,344
  282,880
  302,160
  322,221
  343,104
  364,853

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  18,775
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  52,666
  48,644
  61,890
  77,367
  95,167
  115,347
  137,938
  162,942
  190,339
  220,094
  252,160
  286,485
  323,014
  361,699
  402,493
  445,360
  490,277
  537,231
  586,222
  637,267
  690,393
  745,645
  803,079
  862,767
  924,793
  989,253
  1,056,257
  1,125,927
  1,198,395
  1,273,806
  1,352,316
Adjusted assets (=assets-cash), $m
  33,891
  48,644
  61,890
  77,367
  95,167
  115,347
  137,938
  162,942
  190,339
  220,094
  252,160
  286,485
  323,014
  361,699
  402,493
  445,360
  490,277
  537,231
  586,222
  637,267
  690,393
  745,645
  803,079
  862,767
  924,793
  989,253
  1,056,257
  1,125,927
  1,198,395
  1,273,806
  1,352,316
Revenue / Adjusted assets
  0.615
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
  0.556
Average production assets, $m
  10,768
  13,956
  17,756
  22,196
  27,303
  33,093
  39,574
  46,747
  54,607
  63,144
  72,344
  82,191
  92,672
  103,770
  115,474
  127,772
  140,659
  154,129
  168,185
  182,829
  198,071
  213,923
  230,400
  247,524
  265,319
  283,813
  303,036
  323,024
  343,815
  365,450
  387,974
Working capital, $m
  20,116
  2,867
  3,648
  4,560
  5,609
  6,798
  8,130
  9,603
  11,218
  12,971
  14,861
  16,884
  19,037
  21,317
  23,721
  26,248
  28,895
  31,662
  34,550
  37,558
  40,689
  43,945
  47,330
  50,848
  54,504
  58,303
  62,252
  66,358
  70,629
  75,073
  79,700
Total debt, $m
  21,552
  29,945
  40,979
  53,871
  68,698
  85,508
  104,327
  125,155
  147,976
  172,762
  199,473
  228,066
  258,495
  290,719
  324,700
  360,409
  397,825
  436,937
  477,747
  520,267
  564,521
  610,546
  658,389
  708,109
  759,776
  813,472
  869,286
  927,321
  987,687
  1,050,504
  1,115,903
Total liabilities, $m
  32,128
  40,521
  51,555
  64,447
  79,274
  96,084
  114,903
  135,731
  158,552
  183,338
  210,049
  238,642
  269,071
  301,295
  335,276
  370,985
  408,401
  447,513
  488,323
  530,843
  575,097
  621,122
  668,965
  718,685
  770,352
  824,048
  879,862
  937,897
  998,263
  1,061,080
  1,126,479
Total equity, $m
  20,538
  8,124
  10,336
  12,920
  15,893
  19,263
  23,036
  27,211
  31,787
  36,756
  42,111
  47,843
  53,943
  60,404
  67,216
  74,375
  81,876
  89,718
  97,899
  106,424
  115,296
  124,523
  134,114
  144,082
  154,440
  165,205
  176,395
  188,030
  200,132
  212,726
  225,837
Total liabilities and equity, $m
  52,666
  48,645
  61,891
  77,367
  95,167
  115,347
  137,939
  162,942
  190,339
  220,094
  252,160
  286,485
  323,014
  361,699
  402,492
  445,360
  490,277
  537,231
  586,222
  637,267
  690,393
  745,645
  803,079
  862,767
  924,792
  989,253
  1,056,257
  1,125,927
  1,198,395
  1,273,806
  1,352,316
Debt-to-equity ratio
  1.049
  3.690
  3.960
  4.170
  4.320
  4.440
  4.530
  4.600
  4.660
  4.700
  4.740
  4.770
  4.790
  4.810
  4.830
  4.850
  4.860
  4.870
  4.880
  4.890
  4.900
  4.900
  4.910
  4.910
  4.920
  4.920
  4.930
  4.930
  4.940
  4.940
  4.940
Adjusted equity ratio
  0.078
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167
  0.167

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,400
  4,747
  8,303
  12,484
  17,316
  22,815
  28,987
  35,834
  43,348
  51,520
  60,335
  70,340
  80,398
  91,055
  102,298
  114,117
  126,505
  139,460
  152,980
  167,072
  181,742
  197,004
  212,873
  229,370
  246,518
  264,344
  282,880
  302,160
  322,221
  343,104
  364,853
Depreciation, amort., depletion, $m
  1,353
  1,737
  2,001
  2,310
  2,664
  3,066
  3,516
  4,015
  4,560
  5,153
  5,792
  5,708
  6,436
  7,206
  8,019
  8,873
  9,768
  10,703
  11,680
  12,696
  13,755
  14,856
  16,000
  17,189
  18,425
  19,709
  21,044
  22,432
  23,876
  25,378
  26,943
Funds from operations, $m
  1,690
  6,484
  10,304
  14,794
  19,980
  25,881
  32,504
  39,848
  47,909
  56,673
  66,127
  76,048
  86,834
  98,261
  110,317
  122,990
  136,273
  150,163
  164,660
  179,768
  195,497
  211,860
  228,873
  246,559
  264,943
  284,053
  303,924
  324,592
  346,097
  368,483
  391,796
Change in working capital, $m
  -1,513
  656
  781
  912
  1,049
  1,189
  1,331
  1,474
  1,615
  1,754
  1,890
  2,023
  2,153
  2,280
  2,404
  2,526
  2,647
  2,767
  2,887
  3,008
  3,131
  3,256
  3,385
  3,518
  3,656
  3,799
  3,949
  4,106
  4,271
  4,444
  4,627
Cash from operations, $m
  3,203
  5,828
  9,523
  13,882
  18,931
  24,692
  31,172
  38,375
  46,294
  54,919
  64,238
  74,025
  84,681
  95,981
  107,912
  120,463
  133,626
  147,396
  161,773
  176,760
  192,366
  208,603
  225,488
  243,041
  261,287
  280,254
  299,976
  320,486
  341,826
  364,038
  387,169
Maintenance CAPEX, $m
  0
  -748
  -969
  -1,233
  -1,541
  -1,896
  -2,298
  -2,748
  -3,246
  -3,792
  -4,385
  -5,024
  -5,708
  -6,436
  -7,206
  -8,019
  -8,873
  -9,768
  -10,703
  -11,680
  -12,696
  -13,755
  -14,856
  -16,000
  -17,189
  -18,425
  -19,709
  -21,044
  -22,432
  -23,876
  -25,378
New CAPEX, $m
  -1,121
  -3,188
  -3,800
  -4,440
  -5,107
  -5,790
  -6,481
  -7,173
  -7,860
  -8,537
  -9,200
  -9,848
  -10,480
  -11,098
  -11,704
  -12,299
  -12,886
  -13,471
  -14,055
  -14,644
  -15,242
  -15,852
  -16,478
  -17,124
  -17,795
  -18,493
  -19,223
  -19,988
  -20,791
  -21,635
  -22,524
Cash from investing activities, $m
  -248
  -3,936
  -4,769
  -5,673
  -6,648
  -7,686
  -8,779
  -9,921
  -11,106
  -12,329
  -13,585
  -14,872
  -16,188
  -17,534
  -18,910
  -20,318
  -21,759
  -23,239
  -24,758
  -26,324
  -27,938
  -29,607
  -31,334
  -33,124
  -34,984
  -36,918
  -38,932
  -41,032
  -43,223
  -45,511
  -47,902
Free cash flow, $m
  2,955
  1,892
  4,754
  8,208
  12,283
  17,006
  22,393
  28,453
  35,188
  42,591
  50,653
  59,154
  68,493
  78,447
  89,002
  100,146
  111,866
  124,157
  137,014
  150,436
  164,428
  178,997
  194,155
  209,917
  226,303
  243,336
  261,043
  279,454
  298,603
  318,527
  339,266
Issuance/(repayment) of debt, $m
  13,155
  9,264
  11,034
  12,892
  14,827
  16,811
  18,818
  20,828
  22,822
  24,786
  26,711
  28,593
  30,429
  32,224
  33,981
  35,709
  37,416
  39,112
  40,810
  42,520
  44,254
  46,025
  47,843
  49,720
  51,667
  53,695
  55,814
  58,035
  60,366
  62,817
  65,399
Issuance/(repurchase) of shares, $m
  -274
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  12,686
  9,264
  11,034
  12,892
  14,827
  16,811
  18,818
  20,828
  22,822
  24,786
  26,711
  28,593
  30,429
  32,224
  33,981
  35,709
  37,416
  39,112
  40,810
  42,520
  44,254
  46,025
  47,843
  49,720
  51,667
  53,695
  55,814
  58,035
  60,366
  62,817
  65,399
Total cash flow (excl. dividends), $m
  15,158
  11,156
  15,788
  21,100
  27,110
  33,816
  41,211
  49,281
  58,009
  67,377
  77,364
  87,746
  98,922
  110,671
  122,984
  135,855
  149,282
  163,269
  177,824
  192,956
  208,682
  225,022
  241,997
  259,637
  277,970
  297,031
  316,858
  337,489
  358,969
  381,345
  404,665
Retained Cash Flow (-), $m
  673
  -1,865
  -2,212
  -2,585
  -2,972
  -3,370
  -3,773
  -4,176
  -4,575
  -4,969
  -5,355
  -5,732
  -6,101
  -6,460
  -6,813
  -7,159
  -7,501
  -7,841
  -8,182
  -8,524
  -8,872
  -9,227
  -9,592
  -9,968
  -10,358
  -10,765
  -11,190
  -11,635
  -12,102
  -12,594
  -13,111
Prev. year cash balance distribution, $m
 
  14,279
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  23,570
  13,576
  18,516
  24,138
  30,446
  37,439
  45,106
  53,434
  62,407
  72,009
  82,014
  92,822
  104,211
  116,171
  128,696
  141,781
  155,428
  169,642
  184,432
  199,810
  215,795
  232,406
  249,669
  267,612
  286,267
  305,668
  325,854
  346,867
  368,751
  391,554
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  22,599
  12,428
  16,114
  19,875
  23,600
  27,171
  30,473
  33,398
  35,850
  37,752
  38,947
  39,610
  39,623
  39,001
  37,783
  36,030
  33,819
  31,241
  28,397
  25,390
  22,320
  19,284
  16,364
  13,630
  11,136
  8,918
  6,994
  5,367
  4,025
  2,948
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Abbott Laboratories manufactures and sells health care products worldwide. The company’s Established Pharmaceutical Products segment offers branded generic pharmaceuticals to treat pancreatic exocrine insufficiency; irritable bowel syndrome or biliary spasm; intrahepatic cholestasis or depressive symptoms; gynecological disorders; hormone replacement therapy; dyslipidemia; hypertension; hypothyroidism; Ménière's disease and vestibular vertigo; pain, fever, and inflammation; migraines; anti-infective clarithromycin; cardiovascular and metabolic products; and influenza vaccines, as well as to regulate physiological rhythm of the colon. Its Diagnostic Products segment provides immunoassay and clinical chemistry systems; assays used to screen and/or diagnosis cancer, cardiac, drugs of abuse, fertility, infectious diseases, and therapeutic drug monitoring; hematology systems and reagents; diagnostic systems and cartridges; instruments to automate the extraction, purification, and preparation of DNA and RNA from patient samples, and detects and measures infectious agents; genomic-based tests; informatics and automation solutions; and a suite of informatics tools and professional services. The company’s Nutritional Products segment provides pediatric and adult nutritional products. Its Vascular Products segment offers coronary, endovascular, vessel closure, and structural heart devices to treat vascular disease. The company also provides blood and flash glucose monitoring systems, including test strips, sensors, data management decision software, and accessories for people with diabetes; and medical devices for the eye, such as cataract and LASIK surgery, contact lens care, and dry eye products. It serves retailers, wholesalers, hospitals, health care facilities, laboratories, physicians' offices, and government agencies. The company was founded in 1888 and is headquartered in Abbott Park, Illinois.

FINANCIAL RATIOS  of  Abbott Laboratories (ABT)

Valuation Ratios
P/E Ratio 52.4
Price to Sales 3.5
Price to Book 3.6
Price to Tangible Book
Price to Cash Flow 22.9
Price to Free Cash Flow 35.2
Growth Rates
Sales Growth Rate 2.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1%
Cap. Spend. - 3 Yr. Gr. Rate -0.4%
Financial Strength
Quick Ratio 22
Current Ratio 0.1
LT Debt to Equity 100.7%
Total Debt to Equity 104.9%
Interest Coverage 9
Management Effectiveness
Return On Assets 3.3%
Ret/ On Assets - 3 Yr. Avg. 6.7%
Return On Total Capital 3.9%
Ret/ On T. Cap. - 3 Yr. Avg. 8.9%
Return On Equity 6.7%
Return On Equity - 3 Yr. Avg. 12.4%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 56.8%
Gross Margin - 3 Yr. Avg. 56.2%
EBITDA Margin 14.1%
EBITDA Margin - 3 Yr. Avg. 19.6%
Operating Margin 15.3%
Oper. Margin - 3 Yr. Avg. 14%
Pre-Tax Margin 6.8%
Pre-Tax Margin - 3 Yr. Avg. 11.6%
Net Profit Margin 6.7%
Net Profit Margin - 3 Yr. Avg. 13.2%
Effective Tax Rate 24.8%
Eff/ Tax Rate - 3 Yr. Avg. 24.8%
Payout Ratio 109.9%

ABT stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ABT stock intrinsic value calculation we used $20853 million for the last fiscal year's total revenue generated by Abbott Laboratories. The default revenue input number comes from 2016 income statement of Abbott Laboratories. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ABT stock valuation model: a) initial revenue growth rate of 29.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ABT is calculated based on our internal credit rating of Abbott Laboratories, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Abbott Laboratories.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ABT stock the variable cost ratio is equal to 29%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $11907 million in the base year in the intrinsic value calculation for ABT stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Abbott Laboratories.

Corporate tax rate of 27% is the nominal tax rate for Abbott Laboratories. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ABT stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ABT are equal to 51.6%.

Life of production assets of 14.4 years is the average useful life of capital assets used in Abbott Laboratories operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ABT is equal to 10.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $20538 million for Abbott Laboratories - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1713.53 million for Abbott Laboratories is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Abbott Laboratories at the current share price and the inputted number of shares is $85.4 billion.

Management's discussion and analysis

Financial Review 

        Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott's primary products are nutritional products, branded generic pharmaceuticals, diagnostic testing products and vascular products. Sales in international markets comprise approximately 70 percent of consolidated net sales.

        On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, Inc. (St. Jude Medical), a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, based on Abbott's closing stock price on the acquisition date. As part of the acquisition, approximately $5.8 billion of St. Jude Medical's debt was assumed or refinanced by Abbott. The transaction provides expanded opportunities for future growth and is an important part of the company's ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals. The combined company will compete in nearly every area of the $30 billion cardiovascular market as well as in the neuromodulation market. As the acquisition of St. Jude Medical was completed after December 31, 2016, Abbott's consolidated financial statements do not include the financial condition or the operating results of St. Jude Medical in any of the periods presented herein.

        In September 2016, Abbott announced that it had entered into a definitive agreement to sell Abbott Medical Optics (AMO), its vision care business, to Johnson & Johnson for $4.325 billion in cash, subject to customary purchase price adjustments for cash, debt and working capital. The decision to sell AMO reflects Abbott's proactive shaping of its portfolio in line with its strategic priorities. The transaction is expected to close in the first quarter of 2017 and is subject to customary closing conditions, including regulatory approvals. The operating results of AMO have continued to be included in Earnings from Continuing Operations as they do not qualify for reporting as discontinued operations. The assets and liabilities of this business are being reported as held for disposition in Abbott's Consolidated Balance Sheet as of December 31, 2016.

        On January 30, 2016, Abbott entered into a definitive agreement to acquire Alere Inc. (Alere), a diagnostic device and service provider, for $56.00 per common share in cash. The acquisition is subject to satisfaction of customary closing conditions, including the accuracy of Alere's representations and warranties (subject to certain materiality qualifications), compliance in all material respects with Alere's covenants and receipt of applicable regulatory approvals. Due to a number of adverse developments that have occurred with respect to Alere since the date of the agreement, Abbott has filed a complaint in the Delaware Court of Chancery seeking to terminate the acquisition agreement on the basis that Alere has experienced a "material adverse effect" under the acquisition agreement and has materially breached certain of its covenants.

        On February 27, 2015, Abbott completed the sale of its developed markets branded generics pharmaceuticals business, which was previously included in the Established Pharmaceutical Products segment, to Mylan Inc. for 110 million shares of Mylan N.V., a newly formed entity that combined Mylan's existing business with Abbott's developed markets branded generics pharmaceuticals business. Abbott retained the branded generics pharmaceuticals business and products of its Established Pharmaceutical Products segment in emerging markets. In April 2015, Abbott sold 40.25 million of its Mylan N.V. ordinary shares. Abbott currently owns 69.75 million Mylan N.V. ordinary shares.

Over the last three years, sales growth was driven primarily by the established pharmaceuticals, nutritional and diagnostics businesses. Sales in emerging markets, which represent nearly 50 percent of total company sales, increased 6.3 percent in 2016 and 17.1 percent in 2015, excluding the impact of foreign exchange. (Emerging markets include all countries except the United States, Western Europe, Japan, Canada, Australia and New Zealand.) Over the last three years, margin improvement was driven primarily by the nutritional and diagnostics businesses. Abbott expanded its operating margin by approximately 120 basis points per year in 2016 and 2015. Abbott's sales, costs, and financial position over the same period were impacted by the strengthening of the U.S. dollar relative to international currencies and a challenging economic and fiscal environment in several emerging economies.

        In Abbott's worldwide nutritional products business, sales over the last three years were positively impacted by demographics such as an aging population and an increasing rate of chronic disease in developed markets and the rise of a middle class in many emerging markets, as well as by numerous new product introductions that leveraged Abbott's strong brands. In 2016, excluding the impact of foreign exchange, strong performance in several markets across Latin America and Southeast Asia, as well as increased U.S. sales were partially offset by challenging market conditions in the Chinese pediatric nutritional business. With respect to the profitability of the nutritional products business, manufacturing and distribution process changes, lower commodity costs, and other cost reductions drove margin improvements across the business over the last three years although such improvements were offset by the negative impact of foreign exchange in 2016. Operating margins for this business increased from 21.0 percent in 2014 to 24.1 percent in 2016.

        In Abbott's worldwide diagnostics business, sales growth over the last three years reflected continued market penetration by the Core Laboratory business in the U.S. and China, and growth in other emerging markets, most notably in Latin America. In addition, the Point of Care diagnostics business continued to expand its geographic presence in targeted developed and emerging markets. Worldwide diagnostic sales increased 5.5 percent in 2016 and 7.3 percent in 2015, excluding the impact of foreign exchange. In 2016, Abbott initiated the launch of Alinity™, an integrated family of next-generation diagnostic systems and solutions which are designed to increase efficiency by running more tests in less space, generating test results faster and minimizing human errors while continuing to provide quality results. In the fourth quarter of 2016, Abbott obtained CE Mark for the Alinity™ point of care, immunoassay, clinical chemistry, and blood screening systems and initiated the launch of these four systems in Europe. Over the next two years, Abbott will work to obtain approval and launch Alinity™ systems in multiple geographies for every area in which its diagnostics business competes.

        Margin improvement continued to be a key focus for the diagnostics business in 2016 although such improvements were offset by the negative impact of foreign exchange. Operating margins increased from 22.9 percent of sales in 2014 to 24.8 percent in 2016 as the business continued to execute on efficiency initiatives in the manufacturing and supply chain functions.

        The Established Pharmaceutical Products segment focuses on the sale of its products in emerging markets after the sale of its developed markets business to Mylan on February 27, 2015. The acquisition of CFR Pharmaceuticals S.A. (CFR) in September 2014 more than doubled Abbott's branded generics pharmaceutical presence in Latin America and further expanded its presence in emerging markets. Through the acquisition of Veropharm, a leading Russian pharmaceutical company in December 2014, Abbott established a manufacturing footprint in Russia and obtained a portfolio of medicines that is well aligned with Abbott's current pharmaceutical therapeutic areas of focus. Excluding the impact of foreign exchange, Established Pharmaceutical sales from continuing operations increased 10.5 percent in 2016 and 34.1 percent in 2015. The sales increase in 2016 was driven by double-digit growth in the Brazil, Russia, India and China (BRIC) geographies, which comprise approximately 45 percent of the sales in the Established Pharmaceutical Products segment. Excluding the impact of the 2014 acquisitions as well as the impact of foreign exchange, 2015 Established Pharmaceutical sales from continuing operations increased 13.4 percent.

In the vascular business, excluding the unfavorable impact of foreign exchange, total sales increased in the low single digits from 2014 to 2016, driven by double-digit growth in Abbott's sales of its MitraClip structural heart device for the treatment of mitral regurgitation, as well endovascular franchise sales growth. These increases were partially offset by pricing pressures primarily related to drug-eluting stents (DES) and lower market share for Abbott's XIENCE DES franchise in certain geographies. The XIENCE DES franchise includes XIENCE V, Prime, nano, Pro, ProX, Xpedition, and Alpine. Abbott has continued to develop its worldwide market-leading XIENCE DES franchise over the last three years. Abbott Vascular Products' latest product introduction, XIENCE Alpine, was launched in various markets across Europe and Asia in 2015 and 2016 and in the U.S. in late 2014. The XIENCE franchise maintained its market-leading global position in 2016. Operating margins declined from 36.5 percent in 2014 to 35.8 percent in 2016 primarily due to the unfavorable effect of foreign exchange and ongoing pricing pressures in the coronary business.

        Abbott's short- and long-term debt totaled $22.0 billion at December 31, 2016, which included the debt issued in anticipation of the St. Jude Medical acquisition. At December 31, 2016, Abbott's long-term debt rating was A+ by Standard and Poor's Corporation and A2 by Moody's Investors Service. In conjunction with the completion of the St. Jude Medical acquisition on January 4, 2017, the ratings were adjusted to BBB by Standard & Poor's Corporation and Baa3 by Moody's Investors Service.

        In anticipation of the acquisition of St. Jude Medical, in November 2016, Abbott issued $15.1 billion of long-term debt consisting of $2.85 billion at 2.35% maturing in 2019; $2.85 billion at 2.90% maturing in 2021; $1.50 billion at 3.40% maturing in 2023; $3.00 billion at 3.75% maturing in 2026; $1.65 billion at 4.75% maturing in 2036; and $3.25 billion at 4.90% maturing in 2046. In November 2016, Abbott also entered into interest rate swap contracts totaling $3.0 billion related to the new debt, which have the effect of changing Abbott's obligation from a fixed interest rate to a variable interest rate obligation on the related debt instruments. In March 2015, Abbott issued $2.5 billion of long-term debt consisting of $750 million at 2.00% maturing in 2020; $750 million at 2.55% maturing in 2022; and $1.0 billion at 2.95% maturing in 2025. In March 2015, Abbott also entered into interest rate swap contracts totaling $2.5 billion related to the debt issuance. These contracts have the effect of changing Abbott's obligation from a fixed interest rate to a variable interest rate obligation. In the fourth quarter of 2014, Abbott extinguished approximately $500 million of long-term debt that was assumed as part of the acquisition of CFR and incurred a charge of $18.3 million related to the early repayment of this debt.

        Abbott declared dividends of $1.045 per share in 2016 compared to $0.98 per share in 2015, an increase of approximately 7%. Dividends paid were $1.539 billion in 2016 compared to $1.443 billion in 2015. The year-over-year change in dividends reflects the impact of the increase in the dividend rate. In December 2016, Abbott increased the company's quarterly dividend to $0.265 per share from $0.26 per share, effective with the dividend paid in February 2017.

        In 2017, Abbott will focus on integrating St. Jude Medical, as well as several other key initiatives. The focus of the integration will be to combine the St. Jude Medical business with Abbott's existing vascular business to create a best-in-class organization and to successfully deliver on new product launches that contribute to a broader, more comprehensive cardiovascular and neuromodulation portfolio. In the nutritional business, Abbott will continue to build its product portfolio with the introduction of new science-based products, expand in high-growth emerging markets and implement additional margin improvement initiatives.

        In the established pharmaceuticals business, Abbott will continue to focus on obtaining additional product approvals across numerous countries and increasing its penetration of emerging markets. In the diagnostics business, Abbott will work to launch the full Alinity™ suite across Europe and into additional geographies, including the U.S., over the next two years. The diagnostics business will also focus on expansion in emerging markets and further improvements in the segment's operating margin. In Abbott's other segments, Abbott will focus on developing differentiated technologies in higher growth markets.

[Source: Form 10-K dated 2017-02-17]

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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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VALUATION THEORY       ASSET ALLOCATION

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