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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Procter & Gamble Co: Cash Flow Valuation Update 2 comments
    Aug 27, 2012 5:35 PM | about stocks: PG

    Current Price: ~ $67/share
    Yield: ~ 3.24%

    Since its founding in 1837, Procter & Gamble has become the world's largest consumer product manufacturer. The firm operates with a lineup of leading brands, including 25 that generate more than $1 billion in annual global sales such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, and Iams pet food. P&G recently sold its last remaining food brand, Pringles, to Kellogg. Sales outside of the U.S.

    Estimated WACC for the firm today is 4.70% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2003 7218
    2004 7338
    2005 6541
    2006 8708
    2007 10490
    2008 12768
    2009 11681
    2010 13005
    2011 9925
    2012 9320

    (click to enlarge)

    Average Annual Growth FCF: ~ 4%

    CAGR FCF: ~ 3%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year

    Consensus Forecast Company 5-Year Growth: ~ 8% per year

    Internal Growth Rate: ~ 3%

    Sustainable Growth Rate: ~ 7%

    Scenario 1

    • Start at $9320 million FCF
    • Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 9320
    1 10066
    2 10871
    3 11741
    4 12680
    5 13694
    Terminal Value 314357

    The firm's future free cash flows, discounted at a WACC of 4.70%, give a present value for the entire firm (Debt + Equity) of $300988 million. If the firm's fair value of debt is estimated at $30148 million, then the fair value of the firm's equity could be $270840 million. $270840 million / 2810 million outstanding shares is approximately $96 per share and a 20% margin of safety is $77/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 4% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 9320
    1 9693
    2 10081
    3 10484
    4 10903
    5 11339
    Terminal Value 250658
    • Present Value of the entire firm (Debt + Equity): $244849 million
    • Value of Equity: $214701 million or $76/share
    • 20% margin of safety is $61/share


    Yahoo! Finance

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: PG
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Comments (2)
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  • starwitchdoctor
    , contributor
    Comments (87) | Send Message
    Thanks for the evaluation, Fair value estimate for me comes to be about 65 dollars steady from November 2010, my latest in depth evaluation of PG.


    27 Aug 2012, 05:41 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
    Author’s reply » Thanks for the read Doc :)
    28 Aug 2012, 11:04 AM Reply Like
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