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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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  • Microsoft Corporation: Cash Flow Valuation Update 0 comments
    Nov 11, 2013 6:39 PM | about stocks: MSFT

    Current Price: ~ $38/share
    Yield: ~ 2.44%

    Microsoft Corporation is engaged in developing, manufacturing, licensing and supporting software products, services and entertainment, and device hardware products.


    SurfaceXbox Windows Phone 8

    Estimated WACC for the firm today is 9.89% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2004 13517
    2005 15793
    2006 12826
    2007 15532
    2008 18430
    2009 15918
    2010 22096
    2011 24639
    2012 29321
    2013 24576

    (click to enlarge)

    Average Annual Growth FCF: ~ 8.6%

    CAGR FCF: ~ 6.9%
    Consensus Forecast Industry 5-Year Growth: ~ 18% per year

    Consensus Forecast Company 5-Year Growth: ~ 7% per year

    Internal Growth Rate: ~ 12.2%

    Sustainable Growth Rate: ~ 24.6%

    Scenario 1

    • Start at $24576 million FCF
    • Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 24576
    1 26296
    2 28137
    3 30107
    4 32214
    5 34469
    Terminal Value 372954

    The firm's future free cash flows, discounted at a WACC of 9.89%, give a present value for the entire firm (Debt + Equity) of $346267 million. If the firm's fair value of debt is estimated at $14600 million, then the fair value of the firm's equity could be $331667 million. $331667 million / 8350 million outstanding shares is approximately $40 per share and a 20% margin of safety is $32/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 10.5% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 24576
    1 27156
    2 30008
    3 33159
    4 36640
    5 40488
    Terminal Value 452404
    • Present Value of the entire firm (Debt + Equity): $407272 million
    • Value of Equity: $392672 million or $47/share
    • 20% margin of safety is $38/share


    Yahoo! Finance


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: MSFT
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