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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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  • Emerson Electric Co: Cash Flow Valuation 0 comments
    Jan 28, 2012 12:41 AM | about stocks: EMR
    Current Price: ~ $52/share
    Projected Yield: ~ 3.10%

    Emerson manages five business segments: process management (28% of sales), industrial automation (21%), network power (27%), climate technologies (16%), and tools and storage (7%). Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions.

    Estimated WACC for the firm today is 12.90% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20021434
    20031394
    20041816
    20051669
    20061911
    20072335
    20082579
    20092555
    20102768
    20112586

    Average Annual Growth FCF: ~ 7%

    CAGR FCF: ~ 7%
    Consensus Forecast Industry 5-Year Growth: ~ 16% per year

    Consensus Forecast Company 5-Year Growth: ~ 12% per year

    Internal Growth Rate: ~ 7%

    Sustainable Growth Rate: ~ 17%

    Scenario 1

    Starting at $2586 million FCF, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    02586
    12896
    23244
    33633
    44069
    54557
    Terminal Value39569

    The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $34196 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $28995 million. $28995 million / 736 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

    Scenario 2

    All else being equal, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 4% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    02586
    12896
    23244
    33633
    44069
    54557
    Terminal Value57353

    The firm's future cash flows, discounted at a WACC of 12.90%, give a present value for the entire firm (Debt + Equity) of $43891 million. If the firm's fair value of debt is estimated at $5201 million, then the fair value of the firm's equity could be $38690 million. $38690 million / 736 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.

    Sources

    Morningstar.com

    Yahoo! Finance

    Emerson.com

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

    Stocks: EMR
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