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