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Honeywell International Inc: $HON cash flow valuation

July 19, 2011 | About:
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Eric Cota

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Honeywell International is a diversified manufacturer that operates four major business segments: aerospace (32% of sales); automation products for process controls, sensing instruments, and safety and security products (41%); specialty materials (14%); and transportation products (13%).

I estimated the firm's WACC today at 13.13% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:



Year


FCF $Millions


2001


1120


2002


1709


2003


1544


2004


1624


2005


1758


2006


2478


2007


3144


2008


2907


2009


3337


2010


3552


TTM


2312


Average Annual Growth FCF: ~ 15%

CAGR FCF: ~ 14%

Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 15% per year

Scenario 1

Average FCF over the past three years is $3265 million. Starting at $3265 million FCF, assuming the company achieves a 5-year growth rate in FCF of 15% 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


3265


1


3755


2


4318


3


4966


4


5711


5


6567


Terminal Value


57513


The firm's future cash flows, discounted at a WACC of 13.13%, give a present value for the entire firm (Debt + Equity) of $48,187 million. If the firm's fair value of debt is estimated at $8132 million, then the fair value of the firm's equity could be $40,055 million. $40,055 million / 787 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.

[/b]

[b]Scenario 2


Starting at $3265 million FCF, assuming the company achieves a 5-year growth rate in FCF of 15% per year, and then a growth rate in FCF of 2.00% per year forever:

Discounted Cash Flow Valuation



Year


FCF $Millions


0


3265


1


3755


2


4318


3


4966


4


5711


5


6567


Terminal Value


67846


The firm's future cash flows, discounted at a WACC of 13.13%, give a present value for the entire firm (Debt + Equity) of $53,763 million. If the firm's fair value of debt is estimated at $8132 million, then the fair value of the firm's equity could be $45,631 million. $45,631 million / 787 million outstanding shares is approximately $58 per share and a 20% margin of safety is $46/share.

About the author:

Eric Cota
GuruFocus - Stock Picks and Market Insight of Gurus

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