Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

W.W. Grainger Inc: cash flow valuation

|Includes: W.W. Grainger, Inc. (GWW)

Current Price: ~ $158/share
Projected Yield: ~ 1.72%

W.W. Grainger provides customers with facility maintenance products. The firm employs a multichannel strategy using physical stores, a website, and direct marketing to sell its products. Grainger generated revenue of $7.2 billion in 2010 and is based in Chicago.


I estimated the firm's WACC today at 11.21% 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
410
2002
169
2003
320
2004
278
2005
320
2006
300
2007
271
2008
347
2009
590
2010
476
TTM
466
 
Average Annual Growth FCF: ~ 11%
CAGR FCF: ~ 2%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 14% per year
 
Scenario 1
Starting at $476 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% 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
476
1
543
2
619
3
705
4
804
5
916
Terminal Value
9317
 
The firm's future cash flows, discounted at a WACC of 11.21%, give a present value for the entire firm (Debt + Equity) of $8041 million. If the firm's fair value of debt is estimated at $500 million, then the fair value of the firm's equity could be $7541 million.  $7541 million / 69 million outstanding shares is approximately $109 per share and a 20% margin of safety is $87/share.
 

Scenario 2
Starting at $476 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and then a growth rate in FCF of 4.25% per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
476
1
543
2
619
3
705
4
804
5
916
Terminal Value
15003
 
The firm's future cash flows, discounted at a WACC of 11.21%, give a present value for the entire firm (Debt + Equity) of $11,383 million. If the firm's fair value of debt is estimated at $500 million, then the fair value of the firm's equity could be $10,883 million.  $10,883 million / 69 million outstanding shares is approximately $158 per share and a 20% margin of safety is $126/share.
 
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.