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Rockwell Collins Inc: Cash Flow Valuation Update

|Includes:Rockwell Collins, Inc. (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

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