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Rockwell Automation: Cash Flow Valuation

|Includes:Rockwell Automation, Inc. (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