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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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  • Hormel Foods Corporation: HRL Cash Flow Valuation Update 0 comments
    Dec 19, 2013 3:49 PM | about stocks: 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

    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

    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

    • 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
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