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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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  • Sysco Corporation: Cash Flow Valuation 0 comments
    Oct 12, 2012 4:49 PM | about stocks: SYY

    Current Price: ~ $31/share
    Yield: ~ 3.46%

    Sysco operates as the largest North American foodservice distributor, controlling 17.5% of the market. The firm distributes more than 400,000 food and nonfood products to 400,000 customers, including restaurants, health care and educational facilities, and lodging establishments. From its founding in 1969 through the end of fiscal 2011, Sysco acquired more than 150 companies or divisions of companies to expand its footprint. Nearly 100% of the firm's sales are derived in North America.

    Estimated WACC for the firm today is 7.45% 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 937
    2004 659
    2005 802
    2006 609
    2007 800
    2008 1080
    2009 1118
    2010 291
    2011 455
    2012 620

    (click to enlarge)

    Average Annual Growth FCF: ~ 6%

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

    Consensus Forecast Company 5-Year G620rowth: ~ 7% per year

    Internal Growth Rate: ~ 4%

    Sustainable Growth Rate: ~ 12%

    Scenario 1

    • Start at $620 million FCF
    • Assume a 5-year growth rate in FCF of 7% per year, then 4% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 620
    1 663
    2 710
    3 760
    4 813
    5 870
    Terminal Value 26960

    The firm's future free cash flows, discounted at a WACC of 7.45%, give a present value for the entire firm (Debt + Equity) of $21883 million. If the firm's fair value of debt is estimated at $3539 million, then the fair value of the firm's equity could be $18344 million. $18344 million / 587 million outstanding shares is approximately $31 per share and a 20% margin of safety is $25/share.

    Scenario 2
    Average FCF (2012, 2009) is $869 million

    • Start at $869 million FCF
    • Assume a 5-year growth rate in FCF of 7% per year, then 2% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 869
    1 930
    2 995
    3 1065
    4 1139
    5 1219
    Terminal Value 23924
    • Present Value of the entire firm (Debt + Equity): $20993 million
    • Value of Equity: $17457 million or $30/share
    • 20% margin of safety is $24/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Sysco.com

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

    Stocks: SYY
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