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Avery Dennison Corp: cash flow valuation

|Includes:Avery Dennison Corporation (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