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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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  • Emerson Electric Co: Cash Flow Valuation Update 0 comments
    Dec 11, 2012 7:55 PM | about stocks: EMR

    Current Price: ~ $52/share
    Yield: ~ 3.14%

    Emerson manages five business segments: process management, industrial automation, network power, climate technologies, and tools and storage. Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions.

    Estimated WACC for the firm today is 12.25% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2003 1394
    2004 1816
    2005 1669
    2006 1911
    2007 2335
    2008 2579
    2009 2555
    2010 2768
    2011 2586
    2012 2388

    (click to enlarge)

    Average Annual Growth FCF: ~ 7%

    CAGR FCF: ~ 6%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

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

    Internal Growth Rate: ~ 3%

    Sustainable Growth Rate: ~ 8%

    Scenario 1
    The highest level of FCF achieved in the past 10 years is $2768 million

    • Start at $2768 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

    Year FCF $Millions
    0 2768
    1 3017
    2 3289
    3 3585
    4 3907
    5 4259
    Terminal Value 37904

    The firm's future free cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $33956 million. If the firm's fair value of debt is estimated at $5088 million, then the fair value of the firm's equity could be $28868 million. $28868 million / 724 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9% per year, then 3.50% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 2768
    1 3017
    2 3289
    3 3585
    4 3907
    5 4259
    Terminal Value 53071
    • Present Value of the entire firm (Debt + Equity): $42468 million
    • Value of Equity: $37380 million or $52/share
    • 20% margin of safety is $42/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Emerson.com

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

    Stocks: EMR
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