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Eaton Corp: cash flow valuation

|Includes: Eaton Corp. plc (ETN)
Current Price: ~ $52/share
Projected Yield: ~ 2.62%
 
 
Eaton provides power management solutions to diversified industrial customers, including electrical systems, hydraulics components, aerospace fuel systems, and truck and auto powertrain systems. Products include UPS systems, hydraulic pumps, cylinders, clutches, and circuit breakers. The company sells to both original-equipment manufacturers and aftermarket customers, and generates over 50% of its sales outside of the U.S.
 
I estimated the firm's WACC today at 13.88% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
Recent free cash flows and growth rates:
Year
FCF $Millions
2001
470
2002
672
2003
601
2004
508
2005
772
2006
1071
2007
807
2008
968
2009
1213
2010
888
TTM
696
 
Average Annual Growth FCF: ~ 11%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 17% per year
Consensus Forecast Company 5-Year Growth: ~ 13% per year
 
Scenario 1
Average FCF in last three years is $1023 million.  Starting at $1023 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% 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
1023
1
1156
2
1306
3
1476
4
1668
5
1885
Terminal Value
15340
 
The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $13,004 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $9260 million.  $9260 million / 341 million outstanding shares is approximately $27 per share and a 20% margin of safety is $22/share.
 

Scenario 2
Starting at $1023 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 7% per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
1023
1
1156
2
1306
3
1476
4
1668
5
1885
Terminal Value
30936
 
The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $21,146 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $17,402 million.  $17,402 million / 341 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.
 
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.