Current Price: ~ $59/share
Projected Yield: ~ 2.30%
Projected Yield: ~ 2.30%
Illinois Tool Works' 840 operating units span 57 countries and generated $15.87 billion in revenue in 2010. Truly a diversified industrial operator, ITW garners about 18% of its business from general industrial markets; 19% from food and beverage service/preparation; 15% from automotive manufacturing and aftermarket; 10% from commercial construction; 12% from residential construction/renovation; 10% from primary metals, consumer durables, and electronics; and 16 % from other sources.
I estimated the firm's WACC today at 12.17% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and growth rates:
| Year | FCF $Millions |
| 2001 | 1094 |
| 2002 | 1017 |
| 2003 | 1110 |
| 2004 | 1249 |
| 2005 | 1553 |
| 2006 | 1765 |
| 2007 | 2131 |
| 2008 | 1867 |
| 2009 | 1899 |
| 2010 | 1275 |
| TTM | 1115 |
Average Annual Growth FCF: ~ 3%
CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 17% per yearConsensus Forecast Company 5-Year Growth: ~ 14% per year
Scenario 1
Average FCF in last three years is $1680 million. Starting at $1680 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% 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 | 1680 |
| 1 | 1915 |
| 2 | 2183 |
| 3 | 2489 |
| 4 | 2837 |
| 5 | 3235 |
| Terminal Value | 30299 |
The firm's future cash flows, discounted at a WACC of 12.17%, give a present value for the entire firm (Debt + Equity) of $25,882 million. If the firm's fair value of debt is estimated at $3535 million, then the fair value of the firm's equity could be $22,347 million. $22,347 million / 500 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.
Scenario 2
Starting at $1680 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and then a growth rate in FCF of 3.75% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 1680 |
| 1 | 1915 |
| 2 | 2183 |
| 3 | 2489 |
| 4 | 2837 |
| 5 | 3235 |
| Terminal Value | 43792 |
The firm's future cash flows, discounted at a WACC of 12.17%, give a present value for the entire firm (Debt + Equity) of $33,480 million. If the firm's fair value of debt is estimated at $3535 million, then the fair value of the firm's equity could be $29,945 million. $29,945 million / 500 million outstanding shares is approximately $60 per share and a 20% margin of safety is $48/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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