Current Price: ~ $52/share
Projected Yield: ~ 3.10%
Emerson manages five business segments: process management (28% of sales), industrial automation (21%), network power (27%), climate technologies (16%), and tools and storage (7%). Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions.
Estimated WACC for the firm today is 12.90% 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
|
1434
|
|
2003
|
1394
|
|
2004
|
1816
|
|
2005
|
1669
|
|
2006
|
1911
|
|
2007
|
2335
|
|
2008
|
2579
|
|
2009
|
2555
|
|
2010
|
2768
|
|
2011
|
2586
|
Average Annual Growth FCF: ~ 7%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 12% per year
Internal Growth Rate: ~ 7%
Sustainable Growth Rate: ~ 17%
Scenario 1
Starting at $2586 million FCF, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
2586
|
|
1
|
2896
|
|
2
|
3244
|
|
3
|
3633
|
|
4
|
4069
|
|
5
|
4557
|
|
Terminal
Value
|
39569
|
The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $34196 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $28995 million. $28995 million / 736 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.
Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 4% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
2586
|
|
1
|
2896
|
|
2
|
3244
|
|
3
|
3633
|
|
4
|
4069
|
|
5
|
4557
|
|
Terminal
Value
|
57353
|
The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $43891 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $38690 million. $38690 million / 736 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/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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