Wednesday, July 20, 2011

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

Tuesday, July 19, 2011

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