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Air Products & Chemicals Inc: Cash Flow Valuation

|Includes: Air Products and Chemicals, Inc. (APD)

Current Price: ~ $88/share
Projected Yield: ~ 2.63%

Established in 1940, Air Products is the world's largest supplier of hydrogen and helium. It offers a unique portfolio of products and services in a number of industries, including technology, energy, industrial, and health care. The company operates in more than 40 countries, with international sales representing 60% of revenue. Air Products generates $10 billion in annual sales and employs almost 20,000 workers.

Estimated WACC for the firm today is 10.50% 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 436
2003 423
2004 380
2005 446
2006 85
2007 442
2008 595
2009 144
2010 492
2011 402

Average Annual Growth FCF: ~ 58%

CAGR FCF: ~ -1%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 6%

Sustainable Growth Rate: ~ 15%

Scenario 1

Starting at $595 million FCF, the highest amount of FCF achieved over the past ten years, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 595
1 660
2 733
3 814
4 903
5 1003
Terminal Value 10602

The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $9452 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $4778 million. $4778 million / 210 million outstanding shares is approximately $23 per share and a 20% margin of safety is $18/share.

Scenario 2

All else being equal, assume the company achieves a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 595
1 660
2 733
3 814
4 903
5 1003
Terminal Value 31825

The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $22336 million. If the firm's fair value of debt is estimated at $4674 million, then the fair value of the firm's equity could be $17662 million. $17662 million / 210 million outstanding shares is approximately $84 per share and a 20% margin of safety is $67/share.

Sources

Morningstar.com

Yahoo! Finance

Airproducts.com

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