Wednesday, June 29, 2011

Praxair Inc: $PX cash flow valuation

Current Price: ~ $108/share
Projected Yield: ~ 1.85%

Praxair is the largest industrial gas supplier in North America and South America. It has a growing presence in Asia and a well-established presence in Europe. Its three main distribution businesses--on-site, merchant liquid, and packaged or cylinder gases--represent 25%, 30%, and 29% of total sales, respectively. Praxair serves a variety of diverse industries, including health care, petroleum refining, aerospace, and chemicals, and generates about $10 billion in annual sales.



I estimated the firm's WACC today at 9.84% 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
425
2002
503
2003
154
2004
575
2005
598
2006
652
2007
582
2008
427
2009
816
2010
517
TTM
347

Average Annual Growth FCF: ~ 28%
CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 13% per year

Scenario 1
The highest level of FCF achieved in the last ten years is $816 million.  Starting at $816 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves a growth rate in FCF of 3% per year forever:
Discounted Cash Flow Valuation
Year
FCF $Millions
0
816
1
922
2
1042
3
1177
4
1330
5
1503
Terminal Value
24830

The firm's future cash flows, discounted at a WACC of 9.84%, give a present value for the entire firm (Debt + Equity) of $19,974 million. If the firm's fair value of debt is estimated at $6138 million, then the fair value of the firm's equity could be $13,836 million.  $13,836 million / 303 million outstanding shares is approximately $46 per share and a 20% margin of safety is $37/share.


Scenario 2
Starting at $816 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 6.75% per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
816
1
922
2
1042
3
1177
4
1330
5
1503
Terminal Value
54943

The firm's future cash flows, discounted at a WACC of 9.84%, give a present value for the entire firm (Debt + Equity) of $38,807 million. If the firm's fair value of debt is estimated at $6138 million, then the fair value of the firm's equity could be $32,669 million.  $32,669 million / 303 million outstanding shares is approximately $108 per share and a 20% margin of safety is $86/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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