Projected Yield: ~ 0.77%
I believe Hewlett-Packard Company ($HPQ) is fairly valued at $42/share on a cash flow valuation basis.
Hewlett-Packard manufactures and sells information technology products, and services to businesses and consumers worldwide. With the recent EDS acquisition, we estimate services will constitute about one third of sales, slightly similar to personal computers (30%) but higher than printers (20%) and enterprise storage and servers (13%). The remainder of company sales come from software, financing, and other corporate investments.
I estimated the firm's WACC today at 11.13% 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 | 1034 |
2002 | 3734 |
2003 | 4062 |
2004 | 2962 |
2005 | 6033 |
2006 | 8817 |
2007 | 6575 |
2008 | 11601 |
2009 | 9684 |
2010 | 7789 |
Average Annual Growth FCF: approx. 45%
CAGR FCF: approx. 25%
Consensus Forecast Industry 5-Year Growth: approx. 14% per yearConsensus Forecast Company 5-Year Growth: approx. 10% per year
Assuming the company achieves a 5-year growth rate in FCF of 10% 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 | 7789 |
1 | 8568 |
2 | 9425 |
3 | 10367 |
4 | 11404 |
5 | 12544 |
Terminal Value | 124029 |
The firm's future cash flows, discounted at a WACC of 11.13%, give a present value for the entire firm (Debt + Equity) of $110,968 million. If the firm's fair value of debt is estimated at $20,500 million, then the fair value of the firm's equity could be $90,468 million. $90,468 million / 2160 million outstanding shares is approximately $42 per share and a 20% margin of safety is $34/share.
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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