Seeking Alpha

Eric Cota's  Instablog

Eric Cota
Send Message
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
My blog:
Manzanita Drive
  • Darden Restaurants Inc: Cash Flow Valuation 0 comments
    Aug 28, 2012 5:58 PM | about stocks: DRI

    Current Price: ~ $52/share
    Yield: ~ 3.43%

    With a portfolio of almost 1,800 locations, Darden Restaurants is among the leading casual dining restaurant companies in North America. Olive Garden (710 units) and Red Lobster (692) are the firm's flagship chains, while more emergent concepts include Bahama Breeze (24) and Seasons 52 (9). The August 2007 acquisition of RARE Hospitality added LongHorn Steakhouse (326) and The Capital Grille (40) to Darden's portfolio.

    Estimated WACC for the firm today is 7.36% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    200386
    2004171
    2005254
    2006379
    2007261
    2008305
    2009247
    2010464
    2011345
    2012123

    (click to enlarge)

    Average Annual Growth FCF: ~ 18%

    CAGR FCF: ~ 4%
    Consensus Forecast Industry 5-Year Growth: ~ 16% per year

    Consensus Forecast Company 5-Year Growth: ~ 12% per year

    Internal Growth Rate: ~ 4.5%

    Sustainable Growth Rate: ~ 15%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $311 million

    • Start at $311 million FCF
    • Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0311
    1348
    2390
    3437
    4489
    5548
    Terminal Value8344

    The firm's future free cash flows, discounted at a WACC of 7.36%, give a present value for the entire firm (Debt + Equity) of $7620 million. If the firm's fair value of debt is estimated at $1806 million, then the fair value of the firm's equity could be $5814 million. $5814 million / 129 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 6% per year, then 3% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0311
    1330
    2349
    3370
    4393
    5416
    Terminal Value10126
    • Present Value of the entire firm (Debt + Equity): $8598 million
    • Value of Equity: $6792 million or $53/share
    • 20% margin of safety is $42/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Darden.com

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

    Stocks: DRI
Back To Eric Cota's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.