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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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  • 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:

    YearFCF $Millions
    2003302
    2004296
    2005456
    2006451
    2007474
    2008441
    2009478
    2010595
    2011501
    2012392

    (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

    YearFCF $Millions
    0481
    1524
    2571
    3623
    4679
    5740
    Terminal Value8267

    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

    YearFCF $Millions
    0481
    1524
    2571
    3623
    4679
    5740
    Terminal Value10399
    • 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
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