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.
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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