Wednesday, February 22, 2012

Rockwell Collins Inc: $COL Cash Flow Valuation

Current Price: ~ $59/share
Projected Yield: ~ 1.62%


Rockwell Collins develops communications and aviation electronics for commercial and military customers worldwide. Core competencies include communications, navigation, automated flight control, displays, simulation and training, integrated electronics, and information management systems. The firm sells to governments, airlines, original-equipment manufacturers, and other commercial customers while providing follow-on services and support for many of its products.           


Estimated WACC for the firm today is 11.04% 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
391
2003
302
2004
296
2005
456
2006
451
2007
474
2008
441
2009
478
2010
595
2011
501
TTM
368


Average Annual Growth FCF: ~ 5%
CAGR FCF: ~ 3%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 10%
Sustainable Growth Rate: ~ 48%

Scenario 1
Average FCF (2011, 2010, 2009) is $525 million
  • Start at $525 million FCF
  • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
525
1
572
2
624
3
680
4
741
5
808
Terminal Value
7979



The firm's future cash flows, discounted at a WACC of 11.04%, give a present value for the entire firm (Debt + Equity) of $7212 million. If the firm's fair value of debt is estimated at $866 million, then the fair value of the firm's equity could be $6346 million.  $6346 million / 146 million outstanding shares is approximately $43 per share and a 20% margin of safety is $34/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 9% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
525
1
572
2
624
3
680
4
741
5
808
Terminal Value
12515


  • Present Value of the entire firm (Debt + Equity): $9900 million
  • Value of Equity: $9034 million or $62/share
  • 20% margin of safety is $50/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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