The Only Three Types of Investments You Need to Know 29The sum of the present value of the cash fl ows is $ 1.53 billion.
Given that Mohawk has grown its profi ts and cash fl ow in the high
teens for some time, the company ’ s terminal value could easily be
worth 10 to 12 time s the free cash fl ow of year 2012. Discounted
back to the present, you get a value of $ 4.5 to $ 5.4 billion ( $ 4.51
million 10 or 12), or a total company value of approximately $ 6
to $ 7 billion ( $ 4.5 or $ 5.4 1 $ .8).
Assume shares outstanding increase by 5 percent over the four
years to 72 million from 68.5 million today. Since 2004, diluted
shares outstanding rose by only 1 million shares (less than 2 per-
cent). A $ 6 to $ 7 billion market cap over 72 million shares equals a
share price of $ 83 to $ 97 in 2012, up from $ 35 in June of 2009.
This is an effective yet simplifi ed analysis of the potential intrin-
sic value of Mohawk. In Chapter 10 , I present more detailed case
studies of valuing a couple of distinct businesses. For now, however,
the analysis allows you to determine whether Mohawk is a good
investment at the current price. We already know that Mohawk is a
great business with a dominant market position. The analysis sug-
gests that Mohawk could be worth at least twice as much in a few
years at the then current price of $ 35 a share based on some very
realistic if not conservative cash fl ow assumptions. It is thus pru-
dent to conclude that Mohawk is currently an undervalued business
because it is underpriced.
Most investors prefer to use a 10 - year discounted cash fl ow
model in determining the true value of a business. Generally,
I agree with this approach, but sometimes I am reluctant to rely on
numbers beyond 5 years from today. A lot can happen to a business
over 10 years; specifi c operating or general economic conditions
can skew results for a year or two. The result is that you would have
to reassess your assumptions anyway, so I fi nd that a 5 - year model is
a good starting point. Again, the important thing is to consider the
business. A company like Coca - Cola generally can be counted on to
sell its product in all environments. But there are few businesses inCH002.indd 29CH002.indd 29 9/2/09 11:06:27 AM9/2/09 11:06:27 AM