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Avery Dennison Corp: Cash Flow Valuation Update

|Includes: Avery Dennison Corporation (AVY)

Current Price: ~ $31/share
Yield: ~ 3.35%

Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio frequency identification, or RFID, inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for nearly 75% of 2011 sales.

Estimated WACC for the firm today is 10.69% 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 371
2003 134
2004 338
2005 253
2006 316
2007 245
2008 348
2009 466
2010 378
2011 292
TTM 437

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ -3%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year

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

Internal Growth Rate: ~ 1.5%

Sustainable Growth Rate: ~ 5%

Scenario 1
Average FCF (2011, 2010, 2009) is $379 million

  • Start at $379 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

Year FCF $Millions
0 379
1 413
2 450
3 491
4 535
5 583
Terminal Value 5946

The firm's future free cash flows, discounted at a WACC of 10.69%, give a present value for the entire firm (Debt + Equity) of $5388 million. If the firm's fair value of debt is estimated at $1440 million, then the fair value of the firm's equity could be $3948 million. $3948 million / 101 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 5.50% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 379
1 400
2 422
3 445
4 470
5 495
Terminal Value 4889
  • Present Value of the entire firm (Debt + Equity): $4587 million
  • Value of Equity: $3147 million or $31/share
  • 20% margin of safety is $25/share

Sources

Morningstar.com

Yahoo! Finance

Averydennison.com

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