Current Price: ~ $59/share
Yield: ~ 2.02%
Rockwell Collins, Inc. designs, produces & supports communications & aviation electronics for commercial & military customers. Its products & services include cabin management systems, radar & surveillance, field support, spares & parts, among others.
Estimated WACC for the firm today is 9.76% 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
|
302
|
2004
|
296
|
2005
|
456
|
2006
|
451
|
2007
|
474
|
2008
|
441
|
2009
|
478
|
2010
|
595
|
2011
|
501
|
2012
|
392
|
Average Annual Growth FCF: ~ 5%
CAGR FCF: ~ 3%
Consensus Forecast Industry 5-Year Growth: ~ 11% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 8%
Sustainable Growth Rate: ~ 41%
Scenario 1
Average FCF (past 5 years) is $481 million
Average FCF (past 5 years) is $481 million
- Start at $481 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
The firm's future free cash flows, discounted at a WACC of 9.76%, give a present value for the entire firm (Debt + Equity) of $7546 million. If the firm's fair value of debt is estimated at $837 million, then the fair value of the firm's equity could be $6709 million. $6709 million / 137 million outstanding shares is approximately $49 per share and a 20% margin of safety is $39/share.
Year
|
FCF $Millions
|
0
|
481
|
1
|
524
|
2
|
571
|
3
|
623
|
4
|
679
|
5
|
740
|
Terminal Value
|
8267
|
The firm's future free cash flows, discounted at a WACC of 9.76%, give a present value for the entire firm (Debt + Equity) of $7546 million. If the firm's fair value of debt is estimated at $837 million, then the fair value of the firm's equity could be $6709 million. $6709 million / 137 million outstanding shares is approximately $49 per share and a 20% margin of safety is $39/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 9% per year, then 2% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF $Millions
|
0
|
481
|
1
|
524
|
2
|
571
|
3
|
623
|
4
|
679
|
5
|
740
|
Terminal Value
|
10399
|
- Present Value of the entire firm (Debt + Equity): $8884 million
- Value of Equity: $8047 million or $59/share
- 20% margin of safety is $47/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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