Avery Dennison Corp: $AVY Cash Flow Valuation Update

Current Price: ~ $31/share
Yield: ~ 3.35%


Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification, or RFID, inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for nearly 75% of 2011 sales.           

Estimated WACC for the firm today is 10.69% 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	371
2003	134
2004	338
2005	253
2006	316
2007	245
2008	348
2009	466
2010	378
2011	292
TTM	437

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ -3%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 1.5%

Sustainable Growth Rate: ~ 5%

Scenario 1
Average FCF (2011, 2010, 2009) is $379 million

• Start at $379 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	379
1	413
2	450
3	491
4	535
5	583
Terminal Value	5946

The firm's future free cash flows, discounted at a WACC of 10.69%, give a present value for the entire firm (Debt + Equity) of $5388 million. If the firm's fair value of debt is estimated at $1440 million, then the fair value of the firm's equity could be $3948 million.  $3948 million / 101 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 5.50% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	379
1	400
2	422
3	445
4	470
5	495
Terminal Value	4889

• Present Value of the entire firm (Debt + Equity): $4587 million
• Value of Equity: $3147 million or $31/share
• 20% margin of safety is $25/share

Sources

Morningstar.com

Yahoo! Finance

Averydennison.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.