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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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  • Rockwell Automation: Cash Flow Valuation 0 comments
    Feb 6, 2012 3:39 PM | about stocks: ROK

    Current Price: ~ $81/share
    Projected Yield: ~ 2.09%

    Rockwell produces industrial process-control equipment designed to make factory floors more efficient. It makes products that control, measure, and monitor processes ranging from beverage production to heavy-equipment manufacturing. Products include motor starters, signaling devices, relays, sensors, and motors. Rockwell's most recognized brand is Allen-Bradley in controllers.

    Estimated WACC for the firm today is 16.84% 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 336
    2003 327
    2004 499
    2005 542
    2006 276
    2007 328
    2008 440
    2009 428
    2010 394
    2011 524

    Average Annual Growth FCF: ~ 9%

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

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

    Internal Growth Rate: ~ 11%

    Sustainable Growth Rate: ~ 43%

    Scenario 1

    Starting at $524 million FCF, assume the company achieves a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 524
    1 587
    2 657
    3 736
    4 825
    5 923
    Terminal Value 6143

    The firm's future cash flows, discounted at a WACC of 16.84%, give a present value for the entire firm (Debt + Equity) of $5133 million. If the firm's fair value of debt is estimated at $1125 million, then the fair value of the firm's equity could be $4008 million. $4008 million / 142 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

    Scenario 2

    All else being equal, assume the company achieves a 5-year growth rate in FCF of 12% per year, then 11% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 524
    1 587
    2 657
    3 736
    4 825
    5 923
    Terminal Value 17718

    The firm's future cash flows, discounted at a WACC of 16.84%, give a present value for the entire firm (Debt + Equity) of $10450 million. If the firm's fair value of debt is estimated at $1125 million, then the fair value of the firm's equity could be $9325 million. $9325 million / 142 million outstanding shares is approximately $66 per share and a 20% margin of safety is $53/share.

    Sources

    Morningstar.com

    Yahoo! Finance

    Rockwellautomation.com

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

    Stocks: ROK
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