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I recently turned my attention to mid-cap value stocks. The screens focused on stocks with manageable debt to equity ratios, good price to free cash flow ratios, cash on hand, and return on equity. Big Lots Inc. (NYSE:BIG) and Western Digital Corp. (NASDAQ:WDC) offer good long term free cash flow growth and good value. I ran a discounted free cash flow valuation analysis at a 12% discount rate for both companies.

Western Digital Corp. designs, develops, manufactures, and sells hard drives for data storage. Western Digital fundamentals are excellent: with a market cap of $8.46 billion, $2 billion in free cash flow, $3.5 billion in cash on hand, and $2.1 billion in debt. The 0.6 debt to equity ratio is excellent. It currently has a P/E of 4.6. Growth has been very good, with five year free cash flow growth at about 25%. The market is concerned that Western Digital's business is fading as cloud computing becomes popular. My valuation accounts for a drop in growth, but I'm not so sure that cloud computing poses that great a threat to Western Digital. Looking at the discounted free cash flow valuation, we can run several scenarios. If we give Western Digital a pessimistic growth rate of 0% over the next 10 years, I place fair value at $69.71, with a 51% margin of safety at today's price of $34.17. If we give Western Digital a modest growth rate of 10%, we get a fair value of $114.73 and a 71% margin of safety. At a more optimistic growth rate of 25%, I place fair value at $251.83 with an 86% margin of safety. I prefer the conservative 10% growth projection, and at least a 50% margin of safety; that would put a buy price at $57.37 or under.

Big Lots, Inc. focuses on broadline closeout retailing. Its wholesale operations are conducted through Big Lots Wholesale, Consolidated International, and Wisconsin Toy, with online sales. Big Lots fundamentals are excellent: with a market cap of $1.7 billion, $154 million in free cash flow, $62 million in cash on hand, and $243 million in debt. The 1.6 debt to equity ratio is within the range I look for. It currently has a P/E of 10. Growth has been very good, despite adverse retail conditions, with five year free cash flow growth at about 22%. There very well could be a drop in growth, as the past two quarters have disappointed. I consider that in my valuation, and it looks like the current price more than reflects that pessimism. Looking at a discounted free cash flow analysis, if we give Big Lots a more modest growth rate of 11%, we get a fair value of $56.51 and a 52% margin of safety at today's price of $27.19. If growth continues at 22%, I place fair value at $108.43 with a 75% margin of safety. If you believe growth might slow to 0%, I would place fair value at $28.91, with a paltry 6% margin of safety. I prefer the conservative 11% growth projection, and at least a 50% margin of safety; that would put a buy price at $28.25 or under.

Source: Discounted Free Cash Flow Analysis For 2 Fundamentally Strong Mid-Cap Value Stocks