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United Technologies Corp: cash flow valuation

|Includes: United Technologies Corporation (UTX)

Current Price: ~ $89/share
Projected Yield: ~ 2.17%


United Technologies is a $54 billion diversified conglomerate with business operations serving primarily construction and aerospace markets. Otis elevators, Carrier air conditioners, Pratt & Whitney engines, and Sikorsky helicopters are key United Technologies product lines.


I estimated the firm's WACC today at 11.72% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
Recent free cash flows and noted growth rates:
Year
FCF $Millions
2001
2092
2002
2267
2003
2345
2004
2904
2005
3405
2006
3849
2007
4177
2008
4945
2009
4527
2010
5041
TTM
5215
 
Average Annual Growth FCF: ~ 11%
CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
 
Scenario 1
Starting at $5041 million FCF, assuming the company achieves a 5-year growth rate in FCF of 11% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
5041
1
5596
2
6211
3
6894
4
7653
5
8494
Terminal Value
80419
 
The firm's future cash flows, discounted at a WACC of 11.72%, give a present value for the entire firm (Debt + Equity) of $70,916 million. If the firm's fair value of debt is estimated at $11,289 million, then the fair value of the firm's equity could be $59,627 million.  $59,627 million / 915 million outstanding shares is approximately $65 per share and a 20% margin of safety is $52/share.
 

Scenario 2
Starting at $5041 million FCF, assuming the company achieves a 5-year growth rate in FCF of 11% per year, and then a growth rate in FCF of 3.75% per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
5041
1
5596
2
6211
3
6894
4
7653
5
8494
Terminal Value
118236
 
The firm's future cash flows, discounted at a WACC of 11.72%, give a present value for the entire firm (Debt + Equity) of $92,641 million. If the firm's fair value of debt is estimated at $11,289 million, then the fair value of the firm's equity could be $81,352 million.  $81,352 million / 915 million outstanding shares is approximately $89 per share and a 20% margin of safety is $71/share.
 
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.