General Dynamics: $GD cash flow valuation

Current Price: ~ $70/share
Projected Yield: ~ 2.69%

Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense and the rest from foreign sales and Gulfstream business jets. In 2010, the firm generated $32.4 billion in sales and $2.6 billion in earnings.

I estimated the firm's WACC today at 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	747
2002	861
2003	1499
2004	1536
2005	1777
2006	1794
2007	2451
2008	2620
2009	2455
2010	2616
TTM	2735

Average Annual Growth FCF: ~ 17%

CAGR FCF: ~ 15%

Consensus Forecast Industry 5-Year Growth: ~ 14% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Starting at $2616 million FCF, assuming the company achieves a 5-year growth rate in FCF of 8% 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	2616
1	2825
2	3051
3	3295
4	3559
5	3844
Terminal Value	32105

The firm's future cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $28,942 million. If the firm's fair value of debt is estimated at $4200 million, then the fair value of the firm's equity could be $24,742 million.  $24,742 million / 372 million outstanding shares is approximately $67 per share and a 20% margin of safety is $53/share.

Sources

Morningstar.com

Yahoo! Finance

GeneralDynamics.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Avery Dennison Corp: $AVY cash flow valuation

Current Price: ~ $33/share
Projected Yield: ~ 3.06%

Avery Dennison manufactures pressure-sensitive materials, office products, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for 66% of sales in 2009.

I estimated the firm's WACC today at 12.88% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	240
2002	371
2003	134
2004	338
2005	253
2006	316
2007	245
2008	348
2009	497
2010	403
TTM	299

Average Annual Growth FCF: ~ 21%

CAGR FCF: ~ 6%

Consensus Forecast Industry 5-Year Growth: ~ 14% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Scenario 1

Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% 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	403
1	431
2	461
3	494
4	528
5	565
Terminal Value	4696

The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $4284 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $2714 million.  $2714 million / 106 million outstanding shares is approximately $26 per share and a 20% margin of safety is $20/share.

Scenario 2

Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% per year, and then a growth rate in FCF of 3.00% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	403
1	431
2	461
3	494
4	528
5	565
Terminal Value	6122

The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $5062 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $3492 million.  $3492 million / 106 million outstanding shares is approximately $33 per share and a 20% margin of safety is $26/share.

Sources

Morningstar.com

Yahoo! Finance

AveryDennison.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Honeywell International Inc: $HON cash flow valuation

Current Price: ~ $57/share
Projected Yield: ~ 2.35%

Honeywell International is a diversified manufacturer that operates four major business segments: aerospace (32% of sales); automation products for process controls, sensing instruments, and safety and security products (41%); specialty materials (14%); and transportation products (13%).

I estimated the firm's WACC today at 13.13% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	1120
2002	1709
2003	1544
2004	1624
2005	1758
2006	2478
2007	3144
2008	2907
2009	3337
2010	3552
TTM	2312

Average Annual Growth FCF: ~ 15%

CAGR FCF: ~ 14%

Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 15% per year

Scenario 1

Average FCF over the past three years is $3265 million.  Starting at $3265 million FCF, assuming the company achieves a 5-year growth rate in FCF of 15% 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	3265
1	3755
2	4318
3	4966
4	5711
5	6567
Terminal Value	57513

The firm's future cash flows, discounted at a WACC of 13.13%, give a present value for the entire firm (Debt + Equity) of $48,187 million. If the firm's fair value of debt is estimated at $8132 million, then the fair value of the firm's equity could be $40,055 million.  $40,055 million / 787 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.

Scenario 2

Starting at $3265 million FCF, assuming the company achieves a 5-year growth rate in FCF of 15% per year, and then a growth rate in FCF of 2.00% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	3265
1	3755
2	4318
3	4966
4	5711
5	6567
Terminal Value	67846

The firm's future cash flows, discounted at a WACC of 13.13%, give a present value for the entire firm (Debt + Equity) of $53,763 million. If the firm's fair value of debt is estimated at $8132 million, then the fair value of the firm's equity could be $45,631 million.  $45,631 million / 787 million outstanding shares is approximately $58 per share and a 20% margin of safety is $46/share.

Sources

Morningstar.com

Yahoo! Finance

Honeywell.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.