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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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  • Automatic Data Processing: Cash Flow Valuation Update 0 comments
    Sep 14, 2012 5:34 PM | about stocks: ADP

    Current Price: ~ $58/share
    Yield: ~ 2.73%

    ADP competes in the human resources administration services industry. The firm provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. The firm was founded in 1949 and has its headquarters in Roseland, N.J. It serves more than 560,000 clients with 57,000 employees worldwide.

    Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20031431
    20041188
    20051237
    20061402
    2007975
    20081509
    20091309
    20101455
    20111428
    20121661

    (click to enlarge)

    Average Annual Growth FCF: ~ 4%

    CAGR FCF: ~ 2%
    Consensus Forecast Industry 5-Year Growth: ~ 19% per year

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

    Internal Growth Rate: ~ 2%

    Sustainable Growth Rate: ~ 11.5%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $1515 million

    • Start at $1515 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
    01515
    11651
    21800
    31962
    42139
    52331
    Terminal Value25701

    The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $23435 million. If the firm's fair value of debt is estimated at $17 million, then the fair value of the firm's equity could be $23418 million. $23418 million / 485 million outstanding shares is approximately $48 per share and a 20% margin of safety is $38/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9% per year, then 2.50% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01515
    11651
    21800
    31962
    42139
    52331
    Terminal Value34400
    • Present Value of the entire firm (Debt + Equity): $28865 million
    • Value of Equity: $28848 million or $59/share
    • 20% margin of safety is $47/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Automatic Data Processing

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

    Stocks: ADP
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