Current Price: ~ $89/share
Projected Yield: ~ 2.66%
Based in St. Paul, Minn., 3M manufactures a diversified array of industrial products. Known especially for popular consumer products such as Scotch Tape and Post-It Notes, the company's portfolio also offers liquid crystal display films, health-care technology, heavy-duty adhesives, and more than 40 other technology platforms. 3M is an S&P 500 component and a part of the Dow Jones Industrial Average.
Estimated WACC for the firm today is 11.62% 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
|
2229
|
|
2003
|
3096
|
|
2004
|
3345
|
|
2005
|
3315
|
|
2006
|
2671
|
|
2007
|
2853
|
|
2008
|
3062
|
|
2009
|
4038
|
|
2010
|
4083
|
|
2011
|
3905
|
Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 6%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 10%
Sustainable Growth Rate: ~ 21%
Scenario 1
- Start at $3905 million FCF
- Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 11.62%, give a present value for the entire firm (Debt + Equity) of $53065 million. If the firm's fair value of debt is estimated at $5684 million, then the fair value of the firm's equity could be $47381 million. $47381 million / 695 million outstanding shares is approximately $68 per share and a 20% margin of safety is $54/share.
|
Year
|
FCF
$Millions
|
|
0
|
3905
|
|
1
|
4296
|
|
2
|
4725
|
|
3
|
5198
|
|
4
|
5717
|
|
5
|
6289
|
|
Terminal
Value
|
59548
|
The firm's future cash flows, discounted at a WACC of 11.62%, give a present value for the entire firm (Debt + Equity) of $53065 million. If the firm's fair value of debt is estimated at $5684 million, then the fair value of the firm's equity could be $47381 million. $47381 million / 695 million outstanding shares is approximately $68 per share and a 20% margin of safety is $54/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 10% per year, then 3.50% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
3905
|
|
1
|
4296
|
|
2
|
4725
|
|
3
|
5198
|
|
4
|
5717
|
|
5
|
6289
|
|
Terminal
Value
|
85224
|
- Present Value of the entire firm (Debt + Equity): $67885 million
- Value of Equity: $62201 million or $90/share
- 20% margin of safety is $72/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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