1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Eric Cota
Eric Cota
Articles 

W.W. Grainger Inc: GWW Cash Flow Valuation

July 01, 2011 | About:

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
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.3/5 (7 votes)

Comments

Please leave your comment:


GuruFocus Mobile App


User Generated Screeners


blohmventuresprice/earnings power. p/fcf
blohmventuresprice/earnings power
blohmventureslow coverage sp500 pb and p/fc
blohmventuresminimal coverage but in sp500
teichman82interesting 2
apliszkaInsider >$5
blohmventurespetrovski score and earnings p
daftheadergreat cap allocator
kirk2% Div Growth
BoKraTest

Select portfolio(s):

  • Loading...

Why you are interested?

Your selection and notes will be stored in your portfolio.

Login to add portfolio
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
FEEDBACK