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.

Avery Dennison Corp: $AVY cash flow valuation

Current Price: ~ $33/share
Projected Yield: ~ 3.06%

Avery Dennison manufactures pressure-sensitive materials, office products, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for 66% of sales in 2009.

I estimated the firm's WACC today at 12.88% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	240
2002	371
2003	134
2004	338
2005	253
2006	316
2007	245
2008	348
2009	497
2010	403
TTM	299

Average Annual Growth FCF: ~ 21%

CAGR FCF: ~ 6%

Consensus Forecast Industry 5-Year Growth: ~ 14% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Scenario 1

Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% 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	403
1	431
2	461
3	494
4	528
5	565
Terminal Value	4696

The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $4284 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $2714 million.  $2714 million / 106 million outstanding shares is approximately $26 per share and a 20% margin of safety is $20/share.

Scenario 2

Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% per year, and then a growth rate in FCF of 3.00% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	403
1	431
2	461
3	494
4	528
5	565
Terminal Value	6122

The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $5062 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $3492 million.  $3492 million / 106 million outstanding shares is approximately $33 per share and a 20% margin of safety is $26/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.