Wednesday, December 19, 2012

Air Products & Chemicals Inc: $APD Cash Flow Valuation Update


Current Price: ~ $84/share
Yield: ~ 2.96%

Established in 1940, Air Products is the world's largest supplier of hydrogen and helium. It offers a unique portfolio of products and services in a number of industries, including technology, energy, industrial, and health care. The company operates in more than 40 countries, with international sales representing 60% of revenue. Air Products generates $10 billion in annual sales and employs almost 20,000 workers.         


Estimated WACC for the firm today is 10.11% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2003
423
2004
380
2005
446
2006
85
2007
442
2008
595
2009
144
2010
492
2011
402
2012
278





Average Annual Growth FCF: ~ 55%
CAGR FCF: ~ -4.6%
Consensus Forecast Industry 5-Year Growth: ~ 11% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
Internal Growth Rate: ~ 4%
Sustainable Growth Rate: ~ 11%

Scenario 1
The highest level of FCF achieved in the past 10 years is $595 million
  • Start at $595 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
595
1
660
2
733
3
814
4
903
5
1003
Terminal Value
18221


The firm's future free cash flows, discounted at a WACC of 10.11%, give a present value for the entire firm (Debt + Equity) of $14307 million. If the firm's fair value of debt is estimated at $5006 million, then the fair value of the firm's equity could be $9301 million.  $9301 million / 213 million outstanding shares is approximately $44 per share and a 20% margin of safety is $35/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 11% per year, then 6.75% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
595
1
660
2
733
3
814
4
903
5
1003
Terminal Value
33144


  • Present Value of the entire firm (Debt + Equity): $23527 million
  • Value of Equity: $18521 million or $87/share
  • 20% margin of safety is $70/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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