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Eric Cota

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  • Campbell Soup Co: Cash Flow Valuation Update [View instapost]
    Thanks for the comment. The 20% margin of safety is part of an investing discipline I apply to every valuation regardless of beta because the analysis contains various assumptions for estimating the firm's WACC, future growth rates, etc. and I want to limit my chances of overpaying for a firm that might be overvalued - All the best for maximizing return/risk.

    Eric
    Nov 21 04:18 AM | Likes Like |Link to Comment
  • Coca Cola Company: cash flow valuation [View instapost]
    Thanks for the comments. My estimates and assumptions regarding a firm's WACC are purposefully high because I use a discounted cash flow model to find firms that are more likely undervalued with a margin of safety.

    Here are the assumptions I would use to calculate a WACC for Coca Cola today:

    For Coke's Cost of Equity I would use the CAPM model
    Beta = .42 http://goo.gl/udlzu
    Risk free rate = yield on U.S. 30 year treasury bond = 2.73% http://goo.gl/G1Bbs
    Market Risk Premium ~ 8%; perhaps a slightly high estimate for the average long term market risk premium http://goo.gl/ZnUFe

    KO cost of equity = 2.73 + .42(8) = 6.09%

    Coke's Cost of Debt = weighted average yield on the market value of KO's debt but I don't mind a high estimate so I simplify and go with the highest yielding debt for KO = 4.482% http://goo.gl/e2xVZ

    Market Value for KO equity = $164 billion http://goo.gl/r3sbi
    Market Value for KO debt = $17.4 billion http://goo.gl/Ed2Aq
    KO tax rate ~ 24% http://goo.gl/Ed2Aq

    So my estimate for KO WACC today ~ 5.83%

    How does this compare to your estimated WACC?

    I hope this helps - Please let me know if you have any questions.

    Eric
    Nov 19 04:15 AM | Likes Like |Link to Comment
  • Bemis Company Inc: cash flow valuation [View instapost]
    Not at all - I hope I can help you. But I'll be away from my desk/computer until later this evening PST So I won't be able to get back to you until then. Good luck.

    Eric
    Nov 17 12:11 PM | Likes Like |Link to Comment
  • Procter & Gamble Co: Cash Flow Valuation Update [View instapost]
    Thanks for the read Doc :)
    Aug 28 11:04 AM | Likes Like |Link to Comment
  • Wal-mart Stores Inc: Cash Flow Valuation Update [View instapost]
    Hi Biz:

    Thank you for the comment. Seems like there's a hundred or more different ways to approach the valuation of a firm by discounting future cash flows. But how do you define cash flows, how much growth is expected, and how do you determine a reasonable discount rate? Here's a link to the kind of analysis I'm attempting:

    http://bit.ly/KDni7s

    I'm trying to determine the present value of the firm's future free cash flows where FCF = Operating Cash Flow - CAPEX. I like this simple definition of FCF; preferring to approach the analysis generally using FCF rather than specifically using Free Cash Flow to Equity or FCFE.

    Regarding CAPM, what risk free rate should you use and what market risk premium? I know there's a lot of controversy surrounding CAPM so I don't know if there are any exact answers to these questions. I use the yield on the U.S. 30-year treasury as a risk free rate and 8% market risk premium; long-term views. The yield on the 30-year treasury on March 28, 2012 was 3.28% so that was my risk free rate.

    I think the Dividend Discount analysis you describe is fine. Your valuation for WMT agrees with my conclusions; that WMT may be a reasonable buy at $53 - $62.

    Thanks again for the comment and please let me know if I can give more info. All the best - Eric
    May 26 03:36 PM | Likes Like |Link to Comment
  • Harris Corporation: Cash Flow Valuation [View instapost]
    Q: What do you get as true value if you decrease the excess growth period from 5 to 3?

    All else being equal, something like this:

    Year FCF $Millions
    0 508
    1 549
    2 593
    3 640
    Terminal Value 9560

    Present value of the firm's future cash flows discounted at 7.23% is ~ $9808 million so equity in the firm would be ~ $7608 million --> $66/share and 20% margin of safety is $53/share.

    Thanks for the comments -- Eric
    Jan 30 01:23 PM | Likes Like |Link to Comment
  • Harris Corporation: Cash Flow Valuation [View instapost]
    Hey PSU,

    I'm thinking Harris is a good value here. But I'm not sure how concerned I should be with the high concentration of sales to the U.S. government...
    Jan 30 03:08 AM | Likes Like |Link to Comment
  • Home Depot Inc: cash flow valuation [View instapost]
    Hello BizValstanton:

    Thanks for the comment. Growth into perpetuity seems a bit tricky to me. I know some models choose a perpetual growth rate for the firm that's in line with long-term average growth in U.S. GDP or at least some figure that's greater than 0%. I use 0% perpetual growth as a measure of safety. I'm looking for undervalued firms that generate good FCF and pay dividends. I try to use reasonably harsh assumptions in my model to limit my chance of overpaying. Does my model more likely understate or overstate the value of the firm? -- Hopefully it understates. I accept that my harsh assumptions will cause me to pass on some good investments.

    As for FCF, I use
    FCF = Operating Cash Flow - Capital Expenditures and I get my data primarily from company filings and Morningstar.

    Again, thanks for the comment and all the best,
    Eric
    Jan 21 01:45 PM | Likes Like |Link to Comment
  • McDonald's Corporation: cash flow valuation update [View instapost]
    Alvaro:

    Sounds like you nailed the valuation on MCD. Glad I could help. Good luck for the remainder of the course.

    Eric
    Jul 12 03:15 PM | Likes Like |Link to Comment
  • McDonald's Corporation: cash flow valuation update [View instapost]
    Hi Alvaro:

    FYI - I'm partial to Morningstar.com for all my financial data but I'm looking at Yahoo Finance now to compare:

    Yahoo Finance: On the annual cash flow statement for 2010 under cash flows provided by investing activities, CAPEX is listed at 2135.5 million and this is consistent with Morningstar's data which lists CAPEX at 2136 million.

    It is also consistent with MCD's 10K filing here: goo.gl/gqxJ8

    See the Consolidated Statement of Cash Flows on Page 30, Cash provided by investing activities: property and equipment expenditures: 2135.5 million -- so all appears consistent.

    The 2056 million figure that you mentioned is not precisely what Morningstar and Yahoo Finance refer to as CAPEX but it is the sum total cash flow from all investing activities for 2010.

    P.S. there are several different investing activities going on but CAPEX in this case is just the 2135.5 million cash flow listed for property and equipment expenditures - that which must be invested by the company annually or so to keep the business running.

    I hope this helps - Please let me know if any questions.

    Eric
    Jul 10 08:08 PM | Likes Like |Link to Comment
  • McDonald's Corporation: cash flow valuation update [View instapost]
    Hi Alvaro:

    Congrats on going for the MBA and good luck. I'm a big van of FCF valuations and fundamental analysis in general. Here's hoping your analysis of MCD reveals many interesting points.

    Eric
    Jul 5 03:55 AM | Likes Like |Link to Comment
  • Paychex Inc: cash flow valuation [View instapost]
    Thanks Christian - I'm gonna try to step up the pace with more frequent posts. Best of luck in to you as you pursue the CFA and MBA.
    Jun 24 04:23 PM | Likes Like |Link to Comment
  • Coca Cola Company: cash flow valuation [View instapost]
    Hi ozzfan,

    Thanks for the comment. As a value investor, I hope my assumptions are conservative enough to build in an adequate margin of safety to cut the chances of overpaying. I'm glad the analysis allowed you to make your own assumptions (about the WACC, future growth, etc.) to draw your own conclusion about the value of KO's future cash flows. Way to go. Great company, great brand, great product - just wish I could get it for less.

    All the best,
    Eric
    Mar 19 12:59 AM | Likes Like |Link to Comment
  • Why I (Finally) Gave Up on Johnson & Johnson [View article]
    Like Coca-Cola, JNJ's most valuable asset is it's brand. Never, never, take your brand identity for granted. That management has allowed poor quality and bad ethics to even be whispered in the same sentence with JNJ is grounds for immediate termination. Everything else is secondary and can be fixed with a well-executed strategy. I believe they'll get it right so I'm not giving up yet but I want changes.

    This company stirs up passion because many of us grew up with JNJ and until recently, trusted JNJ, for our kids and our grand kids. Note to JNJ: work on rebuilding your brand and stop betraying our trust.
    Mar 4 01:06 PM | 10 Likes Like |Link to Comment
  • Abbott Laboratories: valuation update [View instapost]
    Curing heart disease with a single injection would be miraculous. Thanks for the link to the Cephalon info.
    Feb 28 02:07 AM | Likes Like |Link to Comment
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