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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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  • Campbell Soup Co: Cash Flow Valuation Update 2 comments
    Nov 11, 2013 5:09 PM | about stocks: CPB

    Current Price: ~ $42/share
    Yield: ~ 2.13%

    Campbell Soup Co manufactures & sells branded convenience food products. Its five segments are: U.S. Simple Meals, Global Baking & Snacking, International Simple Meals & Beverages, U.S. Beverages & Bolthouse and Foodservice.

    Campbell

    Estimated WACC for the firm today is 6.63% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2004456
    2005658
    2006917
    2007340
    2008468
    2009821
    2010742
    2011870
    2012797
    2013683

    (click to enlarge)

    Average Annual Growth FCF: ~ 13%

    CAGR FCF: ~ 4.6%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year

    Consensus Forecast Company 5-Year Growth: ~ 6% per year

    Internal Growth Rate: ~ 4%

    Sustainable Growth Rate: ~ 35%

    Scenario 1

    • Start at $683 million FCF
    • Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0683
    1724
    2767
    3813
    4862
    5914
    Terminal Value14616

    The firm's future free cash flows, discounted at a WACC of 6.63%, give a present value for the entire firm (Debt + Equity) of $13959 million. If the firm's fair value of debt is estimated at $3299 million, then the fair value of the firm's equity could be $10660 million. $10660 million / 314 million outstanding shares is approximately $34 per share and a 20% margin of safety is $27/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9.5% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0683
    1748
    2819
    3897
    4982
    51075
    Terminal Value17761
    • Present Value of the entire firm (Debt + Equity): $16586 million
    • Value of Equity: $13287 million or $42/share
    • 20% margin of safety is $34/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Campbell Soup Company

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

    Stocks: CPB
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Comments (2)
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  • Joseph Poma
    , contributor
    Comments (437) | Send Message
     
    Interesting analysis, but don't you think a 20% margin of safety is a bit extreme for a low beta stock such as CPB?
    19 Nov 2013, 08:22 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Thanks for the comment. The 20% margin of safety is part of an investing discipline I apply to every valuation regardless of beta because the analysis contains various assumptions for estimating the firm's WACC, future growth rates, etc. and I want to limit my chances of overpaying for a firm that might be overvalued - All the best for maximizing return/risk.

     

    Eric
    21 Nov 2013, 04:18 AM Reply Like
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