The Street currently loves food-based companies Tyson Foods (TSN), Starbucks (SBUX), and Kraft (KFT) - rating them all a "buy" or better. Based on my review of the fundamentals, DCF model, and multiples analysis, I find the strongest upside for Tyson, which has had solid momentum across the board.
From a multiples perspective, Tyson is also the cheapest of the three. It trades at a respective 11.8x and 8.2x past and forward earnings while Kraft and Starbucks trade at 21.1x and 29.4x past and forward. It also offers the most attractive free cash flow yield at 4.1%.
Tyson had solid first quarter earnings of $0.42 per share with impressive performance across all segments. One weak point, however, is that meat prices have stayed aggravatingly low, even after supply has been cut back by producers. The firm is investing more in emerging markets, which will hedge against domestic stagnation.
Consensus estimates for Tyson's EPS forecast that it will grow by 6.3% to $2.01 in 2012 and then by 15.4% and 4.3% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $2.27, the rough intrinsic value of the stock is $27.24, implying 44% upside.
Starbucks has had impressive performance in its own right. The firm has penetrated the K-Cup market despite the fact that it has a 34% price premium - yet again highlighting the power of a strong brand. Frappuccino and Doubleshot sales continued to generate strong free cash flow.
Consensus estimates for Starbuck's EPS forecast that it will grow by 21.7% to $1.85 in 2012 and then by 22.2% and 19% in the following two years. Modeling a CAGR of 21% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $33.75, implying a frightening 30.9% downside. As frightening as that downside is, I am doubtful that the optimism surrounding the firm's growth story will dissipate.
Kraft has similarly had strong top-line and bottom-line growth. It has performed well across all geographies with strong momentum being driven through advertising. Perhaps most impressively, volumes have held up well despite pricing hikes.
Consensus estimates for Kraft's EPS forecast that it will grow by 12.9% to $2.28 in FY2011 and then by 10.5% and 10.7% in the following two years. Assuming a multiple of 20x and a conservative 2013 EPS of $2.44, the rough intrinsic value of the stock is $48.80, implying 26.5% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
