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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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  • Avery Dennison Corp: cash flow valuation 0 comments
    Jul 20, 2011 6:46 PM | about stocks: AVY
    Current Price: ~ $33/share
    Projected Yield: ~ 3.06%
     
     
    Avery Dennison manufactures pressure-sensitive materials, office products, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for 66% of sales in 2009.
     
    I estimated the firm's WACC today at 12.88% using the Capital Asset Pricing Model and the company's recent SEC filings.
     
    Recent free cash flows and growth rates:
    Year
    FCF $Millions
    2001
    240
    2002
    371
    2003
    134
    2004
    338
    2005
    253
    2006
    316
    2007
    245
    2008
    348
    2009
    497
    2010
    403
    TTM
    299
     
    Average Annual Growth FCF: ~ 21%
    CAGR FCF: ~ 6%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year
    Consensus Forecast Company 5-Year Growth: ~ 7% per year
     
    Scenario 1
    Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% 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
    403
    1
    431
    2
    461
    3
    494
    4
    528
    5
    565
    Terminal Value
    4696
     
    The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $4284 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $2714 million.  $2714 million / 106 million outstanding shares is approximately $26 per share and a 20% margin of safety is $20/share.
     

    Scenario 2
    Starting at $403 million FCF, assuming the company achieves a 5-year growth rate in FCF of 7% per year, and then a growth rate in FCF of 3.00% per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    403
    1
    431
    2
    461
    3
    494
    4
    528
    5
    565
    Terminal Value
    6122
     
    The firm's future cash flows, discounted at a WACC of 12.88%, give a present value for the entire firm (Debt + Equity) of $5062 million. If the firm's fair value of debt is estimated at $1570 million, then the fair value of the firm's equity could be $3492 million.  $3492 million / 106 million outstanding shares is approximately $33 per share and a 20% margin of safety is $26/share.
     
     
    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate anypositions within the next 72 hours.
    Stocks: AVY
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