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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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  • Deere & Co: Cash Flow Valuation 0 comments
    Feb 7, 2012 5:47 PM | about stocks: DE
    Current Price: ~ $88/share
    Projected Yield: ~ 1.87%

    Based in Moline, Ill., Deere designs and manufactures agricultural, landscaping, construction, and forestry equipment. The firm typically finances a large portion of its equipment sales through its Deere Credit subsidiary. Founded in 1837 by John Deere, the company now employs more than 50,000 people around the world.

    Estimated WACC for the firm today is 10.52% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20021520
    20031226
    2004799
    2005704
    2006207
    20071275
    2008341
    2009677
    2010969
    2011646

    Average Annual Growth FCF: ~ 46%

    CAGR FCF: ~ -9%
    Consensus Forecast Industry 5-Year Growth: ~ 18% per year

    Consensus Forecast Company 5-Year Growth: ~ 14% per year

    Internal Growth Rate: ~ 5%

    Sustainable Growth Rate: ~ 49%

    Scenario 1

    Start at $1520 million FCF (the highest level of FCF achieved in the past 10 years), assume the company achieves a 5-year growth rate in FCF of 14% per year then 4% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01520
    11733
    21975
    32252
    42567
    52927
    Terminal Value51175

    The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $39385 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $13107 million. $13107 million / 404 million outstanding shares is approximately $32 per share and a 20% margin of safety is $26/share.

    Scenario 2

    All else being equal, assume the company achieves a 5-year growth rate in FCF of 14% per year, then 6.75% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    01520
    11733
    21975
    32252
    42567
    52927
    Terminal Value88509

    The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $62027 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $35749 million. $35749 million / 404 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.

    Sources

    Morningstar.com

    Yahoo! Finance

    Deere.com

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

    Stocks: DE
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