Friday, February 24, 2012

Parker Hannifin Corporation: $PH Cash Flow Valuation


Current Price: ~ $90/share
Projected Yield: ~ 1.73%



Parker Hannifin is a diversified manufacturing firm that provides motion and control components and systems. It operates in four business segments: North America industrials, international industrials, aerospace, and climate and controls. The core industrial and aerospace segments have key product categories ranging from hydraulics, fluid connectors, filtration, and automation to flight control systems and components. Parker has nearly 8,200 distributors in 87 countries.           


Estimated WACC for the firm today is 13.62% 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
424
2003
399
2004
521
2005
696
2006
757
2007
717
2008
1036
2009
858
2010
1090
2011
960



Average Annual Growth FCF: ~ 12%
CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 6% per year
Internal Growth Rate: ~ 9%
Sustainable Growth Rate: ~ 21%

Scenario 1
  • Start at $960 million FCF
  • Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
960
1
1018
2
1079
3
1143
4
1212
5
1285
Terminal Value
10000



The firm's future cash flows, discounted at a WACC of 13.62%, give a present value for the entire firm (Debt + Equity) of $9199 million. If the firm's fair value of debt is estimated at $1981 million, then the fair value of the firm's equity could be $7218 million.  $7218 million / 151 million outstanding shares is approximately $48 per share and a 20% margin of safety is $38/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 10% per year, then 6% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
960
1
1056
2
1162
3
1278
4
1406
5
1546
Terminal Value
22327


  • Present Value of the entire firm (Debt + Equity): $16153 million
  • Value of Equity: $14172 million or $94/share
  • 20% margin of safety is $75/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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