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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Analog Devices Inc: ADI Cash Flow Valuation Update

    Current Price: ~ $50/share
    Yield: ~ 2.74%

    Analog Devices Inc is engaged in the design, manufacture and marketing of a portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits used in virtually all types of electronic equipment.

    Estimated WACC for the firm today is 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2004632
    2005587
    2006492
    2007679
    2008512
    2009376
    2010880
    2011778
    2012682
    2013789

    Average Annual Growth FCF: ~ 10%

    CAGR FCF: ~ 2.5%
    Consensus Forecast Industry 5-Year Growth: ~ 24.6% per year

    Consensus Forecast Company 5-Year Growth: ~ 11% per year

    Internal Growth Rate: ~ 4.5%

    Sustainable Growth Rate: ~ 6%

    Scenario 1
    Average FCF (2013 - 2011) is $750 million

    • Start at $750 million FCF
    • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0750
    1833
    2924
    31026
    41139
    51264
    Terminal Value10847

    The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0750
    1833
    2924
    31026
    41139
    51264
    Terminal Value23647
    • Present Value of the entire firm (Debt + Equity): $16435 million
    • Value of Equity: $15563 million or $50/share
    • 20% margin of safety is $40/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Analog Devices Inc

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

    Tags: ADI
    Jan 09 3:52 PM | Link | Comment!
  • L-3 Communications Holdings Inc: LLL Cash Flow Valuation Update

    Current Price: ~ $106/share
    Yield: ~ 2.09%

    L-3 Communications Holdings, Inc is engaged as a system contractor in aircraft modernization & maintenance, Command, Control, Communications, Intelligence, Surveillance and Reconnaissance systems, and government services.

    l3-logo-bevel

    (click to enlarge) (click to enlarge) (click to enlarge)

    Estimated WACC for the firm today is 9.72% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2003373
    2004540
    2005727
    2006918
    20071113
    20081169
    20091221
    20101280
    20111292
    20121096
    2013 guidance*1010

    * Free cash flow guidance remains $1,010,000,000 - Ralph G. D'Ambrosio, Chief Financial Officer and Senior Vice President; Q3 2013 earnings call transcript

    Average Annual Growth FCF: ~ 14.11%

    CAGR FCF: ~ 12.72%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year

    Consensus Forecast Company 5-Year Growth: ~ 2% per year

    Internal Growth Rate: ~ 4%

    Sustainable Growth Rate: ~ 11%

    Scenario 1
    Average FCF (2013* - 2011) is $1133 million

    • Start at $1133 million FCF
    • Assume a 5-year growth rate in FCF of 2% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01133
    11156
    21179
    31202
    41226
    51251
    Terminal Value13129

    The firm's future free cash flows, discounted at a WACC of 9.72%, give a present value for the entire firm (Debt + Equity) of $12833 million. If the firm's fair value of debt is estimated at $3883 million, then the fair value of the firm's equity could be $8950 million. $8950 million / 89 million outstanding shares is approximately $101 per share and a 20% margin of safety is $81/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 6.25% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01133
    11204
    21279
    31359
    41444
    51534
    Terminal Value16773
    • Present Value of the entire firm (Debt + Equity): $15699 million
    • Value of Equity: $11816 million or $133/share
    • 20% margin of safety is $106/share

    Conclusion: Closing out position in LLL for my Fantasy Portfolio today; looking for better value

    Sources

    Morningstar.com

    Yahoo! Finance

    L-3 Communications Holdings Inc

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

    Tags: LLL
    Jan 06 4:18 PM | Link | Comment!
  • Hormel Foods Corporation: HRL Cash Flow Valuation Update

    Current Price: ~ $45/share

    Yield: ~ 1.52%

    Hormel Foods Corporation is engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally.

    Skippy® brand SPAM® Brand

    Jennie-O Turkey Store® products Dinty Moore® stewHormel® chili

    Estimated WACC for the firm today is 9.03% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year

    FCF $Millions

    2004

    214

    2005

    322

    2006

    185

    2007

    211

    2008

    146

    2009

    454

    2010

    396

    2011

    394

    2012

    385

    2013

    531

    Average Annual Growth FCF: ~ 25%

    CAGR FCF: ~ 11%

    Consensus Forecast Industry 5-Year Growth: ~ 13.6% per year

    Consensus Forecast Company 5-Year Growth: ~ 11% per year

    Internal Growth Rate: ~ 7.8%

    Sustainable Growth Rate: ~ 12.6%

    Scenario 1

    Average FCF (2013 - 2009) is $432 million

    • Start at $432 million FCF
    • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year

    FCF $Millions

    0

    432

    1

    480

    2

    532

    3

    591

    4

    656

    5

    728

    Terminal Value

    8948

    The firm's future free cash flows, discounted at a WACC of 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

    Scenario 2

    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 3.75% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year

    FCF $Millions

    0

    432

    1

    480

    2

    532

    3

    591

    4

    656

    5

    728

    Terminal Value

    15303

    • Present Value of the entire firm (Debt + Equity): $12212 million
    • Value of Equity: $11950 million or $45/share
    • 20% margin of safety is $36/share

    Conclusion: Closing out position in HRL for my Fantasy Portfolio today; looking for better value

    Sources

    Morningstar.com

    Yahoo! Finance

    Hormel Foods Corporation

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

    Tags: HRL
    Dec 19 3:49 PM | Link | Comment!
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