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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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  • Automatic Data Processing: $ADP cash flow valuation 0 comments
    Jan 17, 2012 1:34 PM | about stocks: ADP
    Current Price: ~ $56/share
    Projected Yield: ~ 2.88%




    ADP competes in the human resources administration services industry. The firm provides services that satisfy companies' human resources needs, such as payroll processing and benefits administration. The firm was founded in 1949 and has its headquarters in Roseland, N.J. It serves more than 550,000 clients with 46,000 employees worldwide.      


    I estimated the firm's WACC today at 8.82% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:
    Year
    FCF $Millions
    2002
    1276
    2003
    1431
    2004
    1188
    2005
    1237
    2006
    1402
    2007
    975
    2008
    1509
    2009
    1309
    2010
    1455
    2011
    1428

    Average Annual Growth FCF: ~ 4%
    CAGR FCF: ~ 1%
    Consensus Forecast Industry 5-Year Growth: ~ 20% per year
    Consensus Forecast Company 5-Year Growth: ~ 10% per year
    Internal Growth Rate: ~ 2%
    Sustainable Growth Rate: ~ 11%

    Scenario 1
    Starting at $1428 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% 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
    1428
    1
    1571
    2
    1728
    3
    1901
    4
    2091
    5
    2300
    Terminal Value
    28678

    The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $26167 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $26141 million.  $26141 million / 489 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.


    Scenario 2
    All else being equal, assume the company achieves a 5-year growth rate in FCF of 10% per year, then growth in FCF of 2.50% per year forever: :

    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    1428
    1
    1571
    2
    1728
    3
    1901
    4
    2091
    5
    2300
    Terminal Value
    40019

    The firm's future cash flows, discounted at a WACC of 8.82%, give a present value for the entire firm (Debt + Equity) of $33599 million. If the firm's fair value of debt is estimated at $26 million, then the fair value of the firm's equity could be $33573 million.  $33573 million / 489 million outstanding shares is approximately $69 per share and a 20% margin of safety is $55/share.


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