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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: Cash Flow Valuation 0 comments
    Feb 7, 2012 7:06 PM | about stocks: HRL
    Current Price: ~ $29/share
    Projected Yield: ~ 2.07%

    Hormel Foods manufactures and distributes value-added meat products consisting primarily of pork and turkey. A large portion of the company's revenue comes from fresh meats (55% of sales in fiscal 2011) such as sausage, ham, and bacon, as well as turkey (19%) and shelf-stable products (17%) including frozen meals, Spam, and canned chili. The firm's most notable brands include Hormel, Spam, Jennie-O Turkey Store, Lloyd's, and Chi-Chi's.

    Estimated WACC for the firm today is 4.91% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002262
    200312
    2004214
    2005322
    2006185
    2007211
    2008146
    2009454
    2010396
    2011394

    Average Annual Growth FCF: ~ 197%

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

    Consensus Forecast Company 5-Year Growth: ~ 10% per year

    Internal Growth Rate: ~ 9%

    Sustainable Growth Rate: ~ 15%

    Scenario 1

    • Start at $394 million FCF
    • 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0394
    1433
    2477
    3524
    4577
    5635
    Terminal Value14202

    The firm's future cash flows, discounted at a WACC of 4.91%, give a present value for the entire firm (Debt + Equity) of $13449 million. If the firm's fair value of debt is estimated at $267 million, then the fair value of the firm's equity could be $13182 million. $13182 million / 264 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.

    Scenario 2
    All else being equal,

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

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0394
    1414
    2434
    3456
    4479
    5503
    Terminal Value10743
    • Present Value of the entire firm (Debt + Equity): $10427 million
    • Value of Equity: $10160 million or $38/share
    • 20% margin of safety is $30/share

    Scenario 3
    All else being equal,

    • Discount the firm's future cash flows at a WACC of 8%
    • 5-year growth rate in FCF of 10% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0394
    1433
    2477
    3524
    4577
    5635
    Terminal Value8725
    • Present Value of the entire firm (Debt + Equity): $8020 million
    • Value of Equity: $7753 million or $29/share
    • 20% margin of safety is $23/share

    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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