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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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  • Mattel Inc: cash flow valuation 0 comments
    Jul 6, 2011 7:30 PM | about stocks: MAT
    Current Price: ~ $28/share
    Projected Yield: ~ 3.30%
     
    Mattel manufactures toys under several brands names, which include Barbie, Hot Wheels, Fisher Price, and American Girl. The company also produces toys under exclusive entertainment licenses. Its customers are mainly mass retailers and specialty toy stores. Under the American Girl name, Mattel owns retail shops in New York, Chicago, and Los Angeles. The company manufactures and distributes its toys in the United States and internationally.
     
    I estimated the firm's WACC today at 11.30% using the Capital Asset Pricing Model and the company's recent SEC filings.
     
    Recent free cash flows and growth rates:
    Year
    FCF $Millions
    2001
    562
    2002
    1032
    2003
    404
    2004
    427
    2005
    330
    2006
    743
    2007
    414
    2008
    238
    2009
    825
    2010
    391
    TTM
    572
     
    Average Annual Growth FCF: ~ 26%
    CAGR FCF: ~ -4%
    Consensus Forecast Industry 5-Year Growth: ~ 10% per year
    Consensus Forecast Company 5-Year Growth: ~ 9% per year
     
    Scenario 1
    Average FCF in last two years is $608 million.  Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    608
    1
    663
    2
    722
    3
    787
    4
    858
    5
    935
    Terminal Value
    9026
     
    The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $8143 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $6913 million.  $6913 million / 348 million outstanding shares is approximately $20 per share and a 20% margin of safety is $16/share.
     

    Scenario 2
    Starting at $608 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and then a growth rate in FCF of 4% per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    608
    1
    663
    2
    722
    3
    787
    4
    858
    5
    935
    Terminal Value
    13975
     
    The firm's future cash flows, discounted at a WACC of 11.30%, give a present value for the entire firm (Debt + Equity) of $11,040 million. If the firm's fair value of debt is estimated at $1230 million, then the fair value of the firm's equity could be $9810 million.  $9810 million / 348 million outstanding shares is approximately $28 per share and a 20% margin of safety is $23/share.
     
     
    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: MAT
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