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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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  • Eaton Corp: 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
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: ETN
    Jul 06 8:12 PM | Link | Comment!
  • Mattel Inc: 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
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: MAT
    Jul 06 7:30 PM | Link | Comment!
  • Kraft Foods Inc: 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
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: MDLZ
    Jul 05 6:53 PM | Link | Comment!
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