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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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  • Air Products & Chemicals Inc: Cash Flow Valuation 0 comments
    Jan 28, 2012 2:45 PM | about stocks: APD
    Current Price: ~ $88/share
    Projected Yield: ~ 2.63%

    Established in 1940, Air Products is the world's largest supplier of hydrogen and helium. It offers a unique portfolio of products and services in a number of industries, including technology, energy, industrial, and health care. The company operates in more than 40 countries, with international sales representing 60% of revenue. Air Products generates $10 billion in annual sales and employs almost 20,000 workers.

    Estimated WACC for the firm today is 10.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002436
    2003423
    2004380
    2005446
    200685
    2007442
    2008595
    2009144
    2010492
    2011402

    Average Annual Growth FCF: ~ 58%

    CAGR FCF: ~ -1%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

    Consensus Forecast Company 5-Year Growth: ~ 11% per year

    Internal Growth Rate: ~ 6%

    Sustainable Growth Rate: ~ 15%

    Scenario 1

    Starting at $595 million FCF, the highest amount of FCF achieved over the past ten years, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0595
    1660
    2733
    3814
    4903
    51003
    Terminal Value10602

    The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $9452 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $4778 million. $4778 million / 210 million outstanding shares is approximately $23 per share and a 20% margin of safety is $18/share.

    Scenario 2

    All else being equal, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0595
    1660
    2733
    3814
    4903
    51003
    Terminal Value31825

    The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $22336 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $17662 million. $17662 million / 210 million outstanding shares is approximately $84 per share and a 20% margin of safety is $67/share.

    Sources

    Morningstar.com

    Yahoo! Finance

    Airproducts.com

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

    Stocks: APD
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