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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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  • Avery Dennison Corp: Cash Flow Valuation Update 0 comments
    Aug 29, 2012 6:42 PM | about stocks: AVY

    Current Price: ~ $31/share
    Yield: ~ 3.35%

    Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification, or RFID, inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for nearly 75% of 2011 sales.

    Estimated WACC for the firm today is 10.69% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002371
    2003134
    2004338
    2005253
    2006316
    2007245
    2008348
    2009466
    2010378
    2011292
    TTM437

    (click to enlarge)

    Average Annual Growth FCF: ~ 11%

    CAGR FCF: ~ -3%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year

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

    Internal Growth Rate: ~ 1.5%

    Sustainable Growth Rate: ~ 5%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $379 million

    • Start at $379 million FCF
    • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0379
    1413
    2450
    3491
    4535
    5583
    Terminal Value5946

    The firm's future free cash flows, discounted at a WACC of 10.69%, give a present value for the entire firm (Debt + Equity) of $5388 million. If the firm's fair value of debt is estimated at $1440 million, then the fair value of the firm's equity could be $3948 million. $3948 million / 101 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 5.50% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0379
    1400
    2422
    3445
    4470
    5495
    Terminal Value4889
    • Present Value of the entire firm (Debt + Equity): $4587 million
    • Value of Equity: $3147 million or $31/share
    • 20% margin of safety is $25/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Averydennison.com

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

    Stocks: AVY
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