Monday, February 6, 2012

Rockwell Automation: $ROK Cash Flow Valuation


Current Price: ~ $81/share
Projected Yield: ~ 2.09%




Rockwell produces industrial process-control equipment designed to make factory floors more efficient. It makes products that control, measure, and monitor processes ranging from beverage production to heavy-equipment manufacturing. Products include motor starters, signaling devices, relays, sensors, and motors. Rockwell's most recognized brand is Allen-Bradley in controllers.         


Estimated WACC for the firm today is 16.84% 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
336
2003
327
2004
499
2005
542
2006
276
2007
328
2008
440
2009
428
2010
394
2011
524


Average Annual Growth FCF: ~ 9%
CAGR FCF: ~ 5%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 12% per year
Internal Growth Rate: ~ 11%
Sustainable Growth Rate: ~ 43%

Scenario 1
Starting at $524 million FCF, assume the company achieves a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
524
1
587
2
657
3
736
4
825
5
923
Terminal Value
6143


The firm's future cash flows, discounted at a WACC of 16.84%, give a present value for the entire firm (Debt + Equity) of $5133 million. If the firm's fair value of debt is estimated at $1125 million, then the fair value of the firm's equity could be $4008 million.  $4008 million / 142 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.


Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 11% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
524
1
587
2
657
3
736
4
825
5
923
Terminal Value
17718


The firm's future cash flows, discounted at a WACC of 16.84%, give a present value for the entire firm (Debt + Equity) of $10450 million. If the firm's fair value of debt is estimated at $1125 million, then the fair value of the firm's equity could be $9325 million.  $9325 million / 142 million outstanding shares is approximately $66 per share and a 20% margin of safety is $53/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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