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Rockwell Collins Inc: Cash Flow Valuation

|Includes: Rockwell Collins, Inc. (COL)

Current Price: ~ $59/share
Projected Yield: ~ 1.62%

Rockwell Collins develops communications and aviation electronics for commercial and military customers worldwide. Core competencies include communications, navigation, automated flight control, displays, simulation and training, integrated electronics, and information management systems. The firm sells to governments, airlines, original-equipment manufacturers, and other commercial customers while providing follow-on services and support for many of its products.

Estimated WACC for the firm today is 11.04% 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 391
2003 302
2004 296
2005 456
2006 451
2007 474
2008 441
2009 478
2010 595
2011 501
TTM 368

Average Annual Growth FCF: ~ 5%

CAGR FCF: ~ 3%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year

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

Internal Growth Rate: ~ 10%

Sustainable Growth Rate: ~ 48%

Scenario 1
Average FCF (2011, 2010, 2009) is $525 million

  • Start at $525 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
0 525
1 572
2 624
3 680
4 741
5 808
Terminal Value 7979

The firm's future cash flows, discounted at a WACC of 11.04%, give a present value for the entire firm (Debt + Equity) of $7212 million. If the firm's fair value of debt is estimated at $866 million, then the fair value of the firm's equity could be $6346 million. $6346 million / 146 million outstanding shares is approximately $43 per share and a 20% margin of safety is $34/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 9% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 525
1 572
2 624
3 680
4 741
5 808
Terminal Value 12515
  • Present Value of the entire firm (Debt + Equity): $9900 million
  • Value of Equity: $9034 million or $62/share
  • 20% margin of safety is $50/share

Sources

Morningstar.com

Yahoo! Finance

Rockwell Collins Inc

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