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W.W. Grainger Inc: GWW Cash Flow Valuation

July 01, 2011 | About:

Eric Cota

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I estimated the firm's WACC today at 11.21% using the Capital Asset Pricing Model and the company's recent SEC filings. 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.

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.

About the author:

Eric Cota
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