# ConAgra: Free Cash Flow Yield Analysis

The purpose of this article is to explain how I calculate the free cash flow yield of ConAgra (CAG) and evaluate the investment prospects of the company. The data for this article was obtained from the company's latest annual report. I prefer free cash flow yield as a metric for valuing stocks because it presents a rate of return that I can compare against industry peers and other investments such as fixed-income and real estate. The free cash flow yield represents the net cash produced by the business (after consideration of capital expenditures) as a percentage of the company's equity value (market capitalization = diluted shares o/s x share price).

I begin the analysis by reviewing the cash flow statement and obtaining the cash flow from operations and capital expenditures for the last 3 years. ConAgra had discontinued operations during the period which means they were planning to sell certain businesses. I excluded the cash flow from these businesses because they won't be around for much longer. I utilized 100% of the capital expenditures to be conservative and because ConAgra is a fairly mature company. The goal is to calculate the cash generated after capital expenditures to sustain the business (but not expand it). Therefore, it would be appropriate to exclude growth-related capital expenditures. I didn't make this adjustment because I conservatively assumed all capital expenditures were needed to sustain the business.

Free cash flow calculation - 3-yr historical
(Y/E 5/31 - \$ millions)
 2011 2010 2009 Total Cash flow from continuing ops 1,340 1,430 979 3,749 Capital expenditures (466) (482) (428) (1,376) Free cash flow 874 948 551 2,373

The next step is to calculate the average free cash flow per year. I generally use a trailing 3-year period because certain items can skew cash flow generated in any single year. I also prefer to make conservative assumptions, therefore historical cash flows are preferable to estimating future cash flows. The 3-year average free cash flow for ConAgra is \$791 million. This data is somewhat stale because the latest fiscal year-end was May 2011. I reviewed the cash flows for the 9-months ended February 2012 and noted that free cash flow was approximately \$50M less than the previous year, therefore, the results have been fairly consistent and I think the fiscal 2009-2011 data is still relevant for my analysis.

Valuation Calculation
 Free cash flow (\$M) 2,373 3 year average (\$M) 791 Diluted shares o/s (qtr ending 2/26/12) (millions) 420 Closing share price 4/2/12 (\$) 26.55 Market capitalization (\$M) 11,151 Free cash flow yield (avg FCF / market cap) 7.09%

The next step is to calculate the market capitalization of the company. I take the diluted shares outstanding for the most recent quarter (2/28/11 10-Q) and multiply by the most recent closing price of the stock (4/2/12). The result is a market capitalization of \$11.151 billion. When I divide the free cash flow into the market capitalization, the result is a free cash flow yield of 7.09%. The cash earnings of this company represent approximately 7.09% of its value each year. I used diluted shares outstanding because they include items that will dilute the equity ownership such as stock options and convertible debt. ConAgra had 5.7 million dilutive shares for the quarter-ended 2/28/12 which would have resulted in basic weighted average shares outstanding of 414.3 million. Using the basic data would have increased the free cash flow yield by 0.1% to 7.19%.

Upon determining the free cash flow yield (FCF yield), I now have a valuation metric to evaluate the company. My experience indicates that the free cash flow yield is towards the higher end of the range for consumer product companies in the current environment. I am thinking of companies such as Pepsico (PEP), Kimberly-Clark (KMB) and Kraft Foods (KFT). I have seen many free cash flow yields on consumer product companies in a range from 4.5% to 6.5%. I believe ConAgra may be trading at a discount to its peers (in terms of FCF yield) due to limited growth expectations by Wall Street. The next step would be to evaluate whether this discount is reasonable or whether it indicates a potential buying opportunity. I am currently long ConAga, so I have concluded that the discount relative to its peers is an indication of value. When one considers the 7.09% free cash flow yield relative to fixed income investments, it is quite compelling (especially when considering that the income will likely grow in the future verus a bond with a fixed series of payments). This return also exceeds the yield on many real estate investment trusts (REITs). Therefore, the free cash flow yield is attractive to me from a broader investment perspective.

Disclosure: I am long CAG, KFT, KMB, PEP.