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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 Collins Inc: Cash Flow Valuation 0 comments
    Feb 22, 2012 8:28 PM | about stocks: COL
    Current Price: ~ $59/share
    Projected Yield: ~ 1.62%

    Rockwell Collins develops communications and aviation electronics for commercial and military customers worldwide. Core competencies include communications, navigation, automated flight control, displays, simulation and training, integrated electronics, and information management systems. The firm sells to governments, airlines, original-equipment manufacturers, and other commercial customers while providing follow-on services and support for many of its products.

    Estimated WACC for the firm today is 11.04% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002391
    2003302
    2004296
    2005456
    2006451
    2007474
    2008441
    2009478
    2010595
    2011501
    TTM368

    Average Annual Growth FCF: ~ 5%

    CAGR FCF: ~ 3%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

    Consensus Forecast Company 5-Year Growth: ~ 9% per year

    Internal Growth Rate: ~ 10%

    Sustainable Growth Rate: ~ 48%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $525 million

    • Start at $525 million FCF
    • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0525
    1572
    2624
    3680
    4741
    5808
    Terminal Value7979

    The firm's future cash flows, discounted at a WACC of 11.04%, give a present value for the entire firm (Debt + Equity) of $7212 million. If the firm's fair value of debt is estimated at $866 million, then the fair value of the firm's equity could be $6346 million. $6346 million / 146 million outstanding shares is approximately $43 per share and a 20% margin of safety is $34/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9% per year, then 4% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0525
    1572
    2624
    3680
    4741
    5808
    Terminal Value12515
    • Present Value of the entire firm (Debt + Equity): $9900 million
    • Value of Equity: $9034 million or $62/share
    • 20% margin of safety is $50/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Rockwell Collins Inc

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

    Stocks: COL
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