Current Price: ~ $88/share
Projected Yield: ~ 2.63%
Established in 1940, Air Products is the world's largest supplier of hydrogen and helium. It offers a unique portfolio of products and services in a number of industries, including technology, energy, industrial, and health care. The company operates in more than 40 countries, with international sales representing 60% of revenue. Air Products generates $10 billion in annual sales and employs almost 20,000 workers.
Estimated WACC for the firm today is 10.50% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
|
Year
|
FCF
$Millions
|
|
2002
|
436
|
|
2003
|
423
|
|
2004
|
380
|
|
2005
|
446
|
|
2006
|
85
|
|
2007
|
442
|
|
2008
|
595
|
|
2009
|
144
|
|
2010
|
492
|
|
2011
|
402
|
Average Annual Growth FCF: ~ 58%
CAGR FCF: ~ -1%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
Internal Growth Rate: ~ 6%
Sustainable Growth Rate: ~ 15%
Scenario 1
Starting at $595 million FCF, the highest amount of FCF achieved over the past ten years, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
595
|
|
1
|
660
|
|
2
|
733
|
|
3
|
814
|
|
4
|
903
|
|
5
|
1003
|
|
Terminal
Value
|
10602
|
The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $9452 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $4778 million. $4778 million / 210 million outstanding shares is approximately $23 per share and a 20% margin of safety is $18/share.
Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
595
|
|
1
|
660
|
|
2
|
733
|
|
3
|
814
|
|
4
|
903
|
|
5
|
1003
|
|
Terminal
Value
|
31825
|
The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $22336 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $17662 million. $17662 million / 210 million outstanding shares is approximately $84 per share and a 20% margin of safety is $67/share.
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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