Eaton Corp: $ETN cash flow valuation

Current Price: ~ $52/share
Projected Yield: ~ 2.62%

Eaton provides power management solutions to diversified industrial customers, including electrical systems, hydraulics components, aerospace fuel systems, and truck and auto powertrain systems. Products include UPS systems, hydraulic pumps, cylinders, clutches, and circuit breakers. The company sells to both original-equipment manufacturers and aftermarket customers, and generates over 50% of its sales outside of the U.S.

I estimated the firm's WACC today at 13.88% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	470
2002	672
2003	601
2004	508
2005	772
2006	1071
2007	807
2008	968
2009	1213
2010	888
TTM	696

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ 7%

Consensus Forecast Industry 5-Year Growth: ~ 17% per year

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

Scenario 1

Average FCF in last three years is $1023 million.  Starting at $1023 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 no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1023
1	1156
2	1306
3	1476
4	1668
5	1885
Terminal Value	15340

The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $13,004 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $9260 million.  $9260 million / 341 million outstanding shares is approximately $27 per share and a 20% margin of safety is $22/share.

Scenario 2

Starting at $1023 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 7% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1023
1	1156
2	1306
3	1476
4	1668
5	1885
Terminal Value	30936

The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $21,146 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $17,402 million.  $17,402 million / 341 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.

Sources

Morningstar.com

Yahoo! Finance

Eaton.com

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

Mattel Inc: $MAT cash flow valuation

Current Price: ~ $28/share
Projected Yield: ~ 3.30%

Mattel manufactures toys under several brands names, which include Barbie, Hot Wheels, Fisher Price, and American Girl. The company also produces toys under exclusive entertainment licenses. Its customers are mainly mass retailers and specialty toy stores. Under the American Girl name, Mattel owns retail shops in New York, Chicago, and Los Angeles. The company manufactures and distributes its toys in the United States and internationally.

I estimated the firm's WACC today at 11.30% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	562
2002	1032
2003	404
2004	427
2005	330
2006	743
2007	414
2008	238
2009	825
2010	391
TTM	572

Average Annual Growth FCF: ~ 26%

CAGR FCF: ~ -4%

Consensus Forecast Industry 5-Year Growth: ~ 10% per year

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

Scenario 1

Average FCF in last two years is $608 million.  Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% 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	608
1	663
2	722
3	787
4	858
5	935
Terminal Value	9026

The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $8143 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $6913 million.  $6913 million / 348 million outstanding shares is approximately $20 per share and a 20% margin of safety is $16/share.

Scenario 2

Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and then a growth rate in FCF of 4% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	608
1	663
2	722
3	787
4	858
5	935
Terminal Value	13975

The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $11,040 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $9810 million.  $9810 million / 348 million outstanding shares is approximately $28 per share and a 20% margin of safety is $23/share.

Sources

Morningstar.com

Yahoo! Finance

Mattel.com

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

Kraft Foods Inc: $KFT cash flow valuation

Current Price: ~ $36/share
Projected Yield: ~ 3.27%

Kraft is the leading packaged food firm in North America and the second-largest packaged food company in the world behind Nestle. The firm sells snacks, beverages, cheese, and convenient meats, with a product portfolio that includes well-known brands such as Nabisco, Oscar Mayer, Maxwell House, Jell-O, Chips Ahoy, and Kool-Aid. Including the acquisition of Cadbury, international sales now account for around 57% of the consolidated total.

I estimated the firm's WACC today at 6.94% 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	2227
2002	2536
2003	3034
2004	3002
2005	2293
2006	2551
2007	2330
2008	2774
2009	3754
2010	2087

Average Annual Growth FCF: ~ 2%

CAGR FCF: ~ -1%

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

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Scenario 1

Average FCF in last three years is $2872 million.  Starting at $2872 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% 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	2087
1	3159
2	3475
3	3823
4	4205
5	4625
Terminal Value	73332

The firm's future cash flows, discounted at a WACC of 6.94%, give a present value for the entire firm (Debt + Equity) of $68,077 million. If the firm's fair value of debt is estimated at $30,000 million, then the fair value of the firm's equity could be $38,077 million.  $38,077 million / 1760 million outstanding shares is approximately $22 per share and a 20% margin of safety is $18/share.

Scenario 2

Starting at $2872 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and then a growth rate in FCF of 2.30% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	2087
1	3159
2	3475
3	3823
4	4205
5	4625
Terminal Value	109696

The firm's future cash flows, discounted at a WACC of 6.94%, give a present value for the entire firm (Debt + Equity) of $94,079 million. If the firm's fair value of debt is estimated at $30,000 million, then the fair value of the firm's equity could be $64,079 million.  $64,079 million / 1760 million outstanding shares is approximately $36 per share and a 20% margin of safety is $29/share.

Sources

Morningstar.com

Yahoo! Finance

Kraft Foods

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