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Kraft Foods Inc: cash flow valuation

|Includes:Mondelēz International, Inc. (MDLZ)
Current Price: ~ $36/share
Projected Yield: ~ 3.27%
 
Kraft is the leading packaged food firm in North America and the second-largest packaged food company in the world behind Nestle. The firm sells snacks, beverages, cheese, and convenient meats, with a product portfolio that includes well-known brands such as Nabisco, Oscar Mayer, Maxwell House, Jell-O, Chips Ahoy, and Kool-Aid. Including the acquisition of Cadbury, international sales now account for around 57% of the consolidated total.
 
I estimated the firm's WACC today at 6.94% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
Recent free cash flows and noted growth rates:
Year
FCF $Millions
2001
2227
2002
2536
2003
3034
2004
3002
2005
2293
2006
2551
2007
2330
2008
2774
2009
3754
2010
2087
 
Average Annual Growth FCF: ~ 2%
CAGR FCF: ~ -1%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
 
Scenario 1
Average FCF in last three years is $2872 million.  Starting at $2872 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
2087
1
3159
2
3475
3
3823
4
4205
5
4625
Terminal Value
73332
 
The firm's future cash flows, discounted at a WACC of 6.94%, give a present value for the entire firm (Debt + Equity) of $68,077 million. If the firm's fair value of debt is estimated at $30,000 million, then the fair value of the firm's equity could be $38,077 million.  $38,077 million / 1760 million outstanding shares is approximately $22 per share and a 20% margin of safety is $18/share.
 

Scenario 2
Starting at $2872 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and then a growth rate in FCF of 2.30% per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
2087
1
3159
2
3475
3
3823
4
4205
5
4625
Terminal Value
109696
 
The firm's future cash flows, discounted at a WACC of 6.94%, give a present value for the entire firm (Debt + Equity) of $94,079 million. If the firm's fair value of debt is estimated at $30,000 million, then the fair value of the firm's equity could be $64,079 million.  $64,079 million / 1760 million outstanding shares is approximately $36 per share and a 20% margin of safety is $29/share.
 
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: MDLZ