Eric Cota's  Instablog

Eric Cota
Send Message
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
My blog:
Manzanita Drive
  • Rockwell Collins Inc: Cash Flow Valuation Update 0 comments
    Jan 28, 2013 3:39 PM | about stocks: COL

    Current Price: ~ $59/share
    Yield: ~ 2.02%

    Rockwell Collins, Inc. designs, produces & supports communications & aviation electronics for commercial & military customers. Its products & services include cabin management systems, radar & surveillance, field support, spares & parts, among others.

    Estimated WACC for the firm today is 9.76% 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 302
    2004 296
    2005 456
    2006 451
    2007 474
    2008 441
    2009 478
    2010 595
    2011 501
    2012 392

    (click to enlarge)

    Average Annual Growth FCF: ~ 5%

    CAGR FCF: ~ 3%
    Consensus Forecast Industry 5-Year Growth: ~ 11% per year

    Consensus Forecast Company 5-Year Growth: ~ 10% per year

    Internal Growth Rate: ~ 8%

    Sustainable Growth Rate: ~ 41%

    Scenario 1
    Average FCF (past 5 years) is $481 million

    • Start at $481 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
    0 481
    1 524
    2 571
    3 623
    4 679
    5 740
    Terminal Value 8267

    The firm's future free cash flows, discounted at a WACC of 9.76%, give a present value for the entire firm (Debt + Equity) of $7546 million. If the firm's fair value of debt is estimated at $837 million, then the fair value of the firm's equity could be $6709 million. $6709 million / 137 million outstanding shares is approximately $49 per share and a 20% margin of safety is $39/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9% per year, then 2% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 481
    1 524
    2 571
    3 623
    4 679
    5 740
    Terminal Value 10399
    • Present Value of the entire firm (Debt + Equity): $8884 million
    • Value of Equity: $8047 million or $59/share
    • 20% margin of safety is $47/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Rockwellcollins.com

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

    Stocks: COL
Back To Eric Cota's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.