Projected Yield: ~ 1.85%
Praxair is the largest industrial gas supplier in North America and South America. It has a growing presence in Asia and a well-established presence in Europe. Its three main distribution businesses--on-site, merchant liquid, and packaged or cylinder gases--represent 25%, 30%, and 29% of total sales, respectively. Praxair serves a variety of diverse industries, including health care, petroleum refining, aerospace, and chemicals, and generates about $10 billion in annual sales.
I estimated the firm's WACC today at 9.84% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2001 | 425 |
| 2002 | 503 |
| 2003 | 154 |
| 2004 | 575 |
| 2005 | 598 |
| 2006 | 652 |
| 2007 | 582 |
| 2008 | 427 |
| 2009 | 816 |
| 2010 | 517 |
| TTM | 347 |
Average Annual Growth FCF: ~ 28%
CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 14% per yearConsensus Forecast Company 5-Year Growth: ~ 13% per year
Scenario 1
The highest level of FCF achieved in the last ten years is $816 million. Starting at $816 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves a growth rate in FCF of 3% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 816 |
| 1 | 922 |
| 2 | 1042 |
| 3 | 1177 |
| 4 | 1330 |
| 5 | 1503 |
| Terminal Value | 24830 |
The firm's future cash flows, discounted at a WACC of 9.84%, give a present value for the entire firm (Debt + Equity) of $19,974 million. If the firm's fair value of debt is estimated at $6138 million, then the fair value of the firm's equity could be $13,836 million. $13,836 million / 303 million outstanding shares is approximately $46 per share and a 20% margin of safety is $37/share.
Scenario 2
Starting at $816 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 6.75% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 816 |
| 1 | 922 |
| 2 | 1042 |
| 3 | 1177 |
| 4 | 1330 |
| 5 | 1503 |
| Terminal Value | 54943 |
The firm's future cash flows, discounted at a WACC of 9.84%, give a present value for the entire firm (Debt + Equity) of $38,807 million. If the firm's fair value of debt is estimated at $6138 million, then the fair value of the firm's equity could be $32,669 million. $32,669 million / 303 million outstanding shares is approximately $108 per share and a 20% margin of safety is $86/share.
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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