Eric Cota's  Instablog

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:

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

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

• 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

• 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.