Emerson Electric Co: $EMR Cash Flow Valuation Update

Current Price: ~ $52/share
Yield: ~ 3.14%


Emerson manages five business segments: process management, industrial automation, network power, climate technologies, and tools and storage. Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions. 

Estimated WACC for the firm today is 12.25% 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	1394
2004	1816
2005	1669
2006	1911
2007	2335
2008	2579
2009	2555
2010	2768
2011	2586
2012	2388

Average Annual Growth FCF: ~ 7%

CAGR FCF: ~ 6%

Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 3%

Sustainable Growth Rate: ~ 8%

Scenario 1
The highest level of FCF achieved in the past 10 years is $2768 million

• Start at $2768 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	2768
1	3017
2	3289
3	3585
4	3907
5	4259
Terminal Value	37904

The firm's future free cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $33956 million. If the firm's fair value of debt is estimated at $5088 million, then the fair value of the firm's equity could be $28868 million.  $28868 million / 724 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 9% per year, then 3.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	2768
1	3017
2	3289
3	3585
4	3907
5	4259
Terminal Value	53071

• Present Value of the entire firm (Debt + Equity): $42468 million
• Value of Equity: $37380 million or $52/share
• 20% margin of safety is $42/share

Sources

Morningstar.com

Yahoo! Finance

Emerson.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Emerson Electric Co: $EMR Cash Flow Valuation

Current Price: ~ $52/share
Projected Yield: ~ 3.10%



Emerson manages five business segments: process management (28% of sales), industrial automation (21%), network power (27%), climate technologies (16%), and tools and storage (7%). Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions.         

Estimated WACC for the firm today is 12.90% 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	1434
2003	1394
2004	1816
2005	1669
2006	1911
2007	2335
2008	2579
2009	2555
2010	2768
2011	2586

Average Annual Growth FCF: ~ 7%

CAGR FCF: ~ 7%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Internal Growth Rate: ~ 7%

Sustainable Growth Rate: ~ 17%

Scenario 1

Starting at $2586 million FCF, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	2586
1	2896
2	3244
3	3633
4	4069
5	4557
Terminal Value	39569

The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $34196 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $28995 million.  $28995 million / 736 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

Scenario 2

All else being equal, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	2586
1	2896
2	3244
3	3633
4	4069
5	4557
Terminal Value	57353

The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $43891 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $38690 million.  $38690 million / 736 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.

Sources

Morningstar.com

Yahoo! Finance

Emerson.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.