Projected Yield: ~ 1.71%
Hewlett-Packard manufactures and sells information technology products and services to businesses and consumers worldwide. With the recent EDS acquisition, services will constitute about one third of sales, slightly similar to personal computers (30%) but higher than printers (20%) and enterprise storage and servers (13%). The remainder of company sales come from software, financing, and other corporate investments.
Estimated WACC for the firm today is 10.52% 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
|
3734
|
2003
|
4062
|
2004
|
2962
|
2005
|
6033
|
2006
|
8817
|
2007
|
6575
|
2008
|
11601
|
2009
|
9684
|
2010
|
7789
|
2011
|
8100
|
Average Annual Growth FCF: ~ 17%
CAGR FCF: ~ 9%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 4% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 19%
Scenario 1
Starting at $8100 million FCF, assume the company achieves a 5-year growth rate in FCF of 4% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $92968 million. If the firm's fair value of debt is estimated at $31100 million, then the fair value of the firm's equity could be $61868 million. $61868 million / 1980 million outstanding shares is approximately $31 per share and a 20% margin of safety is $25/share.
Year
|
FCF
$Millions
|
0
|
8100
|
1
|
8424
|
2
|
8761
|
3
|
9111
|
4
|
9476
|
5
|
9855
|
Terminal
Value
|
97438
|
The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $92968 million. If the firm's fair value of debt is estimated at $31100 million, then the fair value of the firm's equity could be $61868 million. $61868 million / 1980 million outstanding shares is approximately $31 per share and a 20% margin of safety is $25/share.
Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 4% per year then 2% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
8100
|
1
|
8424
|
2
|
8761
|
3
|
9111
|
4
|
9476
|
5
|
9855
|
Terminal
Value
|
120315
|
The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $106843 million. If the firm's fair value of debt is estimated at $31100 million,then the fair value of the firm's equity could be $75743 million. $75743 million / 1980 million outstanding shares is approximately $38 per share and a 20% margin of safety is $30/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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