Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Air Products & Chemicals Inc: Cash Flow Valuation Update

|Includes:Air Products and Chemicals, Inc. (APD)

Current Price: ~ $84/share
Yield: ~ 2.96%

Established in 1940, Air Products is the world's largest supplier of hydrogen and helium. It offers a unique portfolio of products and services in a number of industries, including technology, energy, industrial, and health care. The company operates in more than 40 countries, with international sales representing 60% of revenue. Air Products generates $10 billion in annual sales and employs almost 20,000 workers.

Estimated WACC for the firm today is 10.11% 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 423
2004 380
2005 446
2006 85
2007 442
2008 595
2009 144
2010 492
2011 402
2012 278
Click to enlarge

(click to enlarge)Click to enlarge

Average Annual Growth FCF: ~ 55%

CAGR FCF: ~ -4.6%
Consensus Forecast Industry 5-Year Growth: ~ 11% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ 4%

Sustainable Growth Rate: ~ 11%

Scenario 1
The highest level of FCF achieved in the past 10 years is $595 million

  • Start at $595 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 595
1 660
2 733
3 814
4 903
5 1003
Terminal Value 18221
Click to enlarge

The firm's future free cash flows, discounted at a WACC of 10.11%, give a present value for the entire firm (Debt + Equity) of $14307 million. If the firm's fair value of debt is estimated at $5006 million, then the fair value of the firm's equity could be $9301 million. $9301 million / 213 million outstanding shares is approximately $44 per share and a 20% margin of safety is $35/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 11% per year, then 6.75% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 595
1 660
2 733
3 814
4 903
5 1003
Terminal Value 33144
Click to enlarge
  • Present Value of the entire firm (Debt + Equity): $23527 million
  • Value of Equity: $18521 million or $87/share
  • 20% margin of safety is $70/share

Sources

Morningstar.com

Yahoo! Finance

Airproducts.com

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

Stocks: APD