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Emerson Electric Co: Cash Flow Valuation Update

|Includes:Emerson Electric Co. (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

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