Pall Corporation: $PLL Cash Flow Valuation

Current Price: ~ $63/share
Projected Yield: ~ 1.33%



Pall makes filters used to remove contaminants from a variety of substances in many critical applications. Once installed, filter media must be replaced regularly to maintain performance levels. The company is divided into two main segments: life sciences and industrial. The former includes Pall's medical and biopharmaceutical units, while the latter is composed of general industrial, aerospace, and microelectronics. Pall's sales also benefit from geographic diversity.           

Estimated WACC for the firm today is 12.49% 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	85
2003	161
2004	131
2005	75
2006	123
2007	235
2008	67
2009	174
2010	183
2011	194
TTM	201

Average Annual Growth FCF: ~ 31%

CAGR FCF: ~ 10%

Consensus Forecast Industry 5-Year Growth: ~ 18% per year

Consensus Forecast Company 5-Year Growth: ~ 13% per year

Internal Growth Rate: ~ 8%

Sustainable Growth Rate: ~ 21%

Regarding the firm's outlook for FCF in 2012, CEO Lawrence D. Kingsley said the following in the Q1 2012 earnings call:

Our operating cash flow is expected to be in the range of $490 million to $540 million, and we're estimating about $185 million in CapEx as we continue to invest in our IT infrastructure, the manufacturing plants and the labs.

And along those lines, we've spent $57 million in the first quarter, which was mainly already committed capital and not great in terms of CapEx run rate in terms of start to the year.

Scenario 1

• Per the firm's outlook, assume operating cash flow of $540 million and CAPEX of $185 million.  Then FCF is $355 million.
• Start at $355 million FCF and assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	355
1	401
2	453
3	512
4	579
5	654
Terminal Value	5918

The firm's future cash flows, discounted at a WACC of 12.49%, give a present value for the entire firm (Debt + Equity) of $5085 million. If the firm's fair value of debt is estimated at $495 million, then the fair value of the firm's equity could be $4590 million.  $4590 million / 115 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 13% per year, then 6% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	355
1	401
2	453
3	512
4	579
5	654
Terminal Value	11391

• Present Value of the entire firm (Debt + Equity): $8124 million
• Value of Equity: $7629 million or $66/share
• 20% margin of safety is $53/share

Sources

Morningstar.com

Yahoo! Finance

Pall.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.