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Hormel Foods Corporation: HRL Cash Flow Valuation Update

|Includes:Hormel Foods Corporation (HRL)

Current Price: ~ $45/share

Yield: ~ 1.52%

Hormel Foods Corporation is engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally.

Skippy® brand SPAM® Brand

Jennie-O Turkey Store® products Dinty Moore® stewHormel® chili

Estimated WACC for the firm today is 9.03% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year

FCF $Millions

2004

214

2005

322

2006

185

2007

211

2008

146

2009

454

2010

396

2011

394

2012

385

2013

531

Click to enlarge

Average Annual Growth FCF: ~ 25%

CAGR FCF: ~ 11%

Consensus Forecast Industry 5-Year Growth: ~ 13.6% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 7.8%

Sustainable Growth Rate: ~ 12.6%

Scenario 1

Average FCF (2013 - 2009) is $432 million

  • Start at $432 million FCF
  • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year

FCF $Millions

0

432

1

480

2

532

3

591

4

656

5

728

Terminal Value

8948

Click to enlarge

The firm's future free cash flows, discounted at a WACC of 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

Scenario 2

All else being equal,

  • Assume a 5-year growth rate in FCF of 11% per year, then 3.75% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year

FCF $Millions

0

432

1

480

2

532

3

591

4

656

5

728

Terminal Value

15303

Click to enlarge
  • Present Value of the entire firm (Debt + Equity): $12212 million
  • Value of Equity: $11950 million or $45/share
  • 20% margin of safety is $36/share

Conclusion: Closing out position in HRL for my Fantasy Portfolio today; looking for better value

Sources

Morningstar.com

Yahoo! Finance

Hormel Foods Corporation

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

Stocks: HRL