Projected Yield: ~ 1.72%
W.W. Grainger provides customers with facility maintenance products. The firm employs a multichannel strategy using physical stores, a website, and direct marketing to sell its products. Grainger generated revenue of $7.2 billion in 2010 and is based in Chicago.
I estimated the firm's WACC today at 11.21% 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 | 410 |
| 2002 | 169 |
| 2003 | 320 |
| 2004 | 278 |
| 2005 | 320 |
| 2006 | 300 |
| 2007 | 271 |
| 2008 | 347 |
| 2009 | 590 |
| 2010 | 476 |
| TTM | 466 |
Average Annual Growth FCF: ~ 11%
CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 12% per yearConsensus Forecast Company 5-Year Growth: ~ 14% per year
Scenario 1
Starting at $476 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 476 |
| 1 | 543 |
| 2 | 619 |
| 3 | 705 |
| 4 | 804 |
| 5 | 916 |
| Terminal Value | 9317 |
The firm's future cash flows, discounted at a WACC of 11.21%, give a present value for the entire firm (Debt + Equity) of $8041 million. If the firm's fair value of debt is estimated at $500 million, then the fair value of the firm's equity could be $7541 million. $7541 million / 69 million outstanding shares is approximately $109 per share and a 20% margin of safety is $87/share.
Scenario 2
Starting at $476 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and then a growth rate in FCF of 4.25% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 476 |
| 1 | 543 |
| 2 | 619 |
| 3 | 705 |
| 4 | 804 |
| 5 | 916 |
| Terminal Value | 15003 |
The firm's future cash flows, discounted at a WACC of 11.21%, give a present value for the entire firm (Debt + Equity) of $11,383 million. If the firm's fair value of debt is estimated at $500 million, then the fair value of the firm's equity could be $10,883 million. $10,883 million / 69 million outstanding shares is approximately $158 per share and a 20% margin of safety is $126/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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