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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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  • J.M. Smucker Co: Cash Flow Valuation Update 0 comments
    Jul 11, 2012 7:17 PM | about stocks: SJM

    Current Price: ~ $75/share
    Projected Yield: ~ 2.57%

    Smucker manufactures and distributes coffee, fruit spreads, peanut butter, shortening and oils, baking mixes and frostings, and natural products under its portfolio of category-leading brands in North America. Notable brands under the Smucker umbrella include Smucker's, Folgers, Dunkin' Donuts brand coffee, Jif, Crisco, Pillsbury, and Hungry Jack. Of these brands, seven are product category leaders in the United States, and eight brands hold a number-one spot in Canada.

    Estimated WACC for the firm today is 5.51% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2003116
    200426
    2005107
    2006135
    2007216
    2008115
    2009336
    2010576
    2011211
    2012457

    Average Annual Growth FCF: ~ 66%

    CAGR FCF: ~ 16%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

    Consensus Forecast Company 5-Year Growth: ~ 8% per year

    Internal Growth Rate: ~ 3%

    Sustainable Growth Rate: ~ 5%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $415 million

    • Start at $415 million FCF
    • Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0415
    1448
    2484
    3523
    4565
    5610
    Terminal Value11961

    The firm's future cash flows, discounted at a WACC of 5.51%, give a present value for the entire firm (Debt + Equity) of $11376 million. If the firm's fair value of debt is estimated at $2444 million, then the fair value of the firm's equity could be $8932 million. $8932 million / 110 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.

    Scenario 2

    All else being equal,

    • Discount the firm's future FCFs at 6.51%:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0415
    1448
    2484
    3523
    4565
    5610
    Terminal Value10116
    • Present Value of the entire firm (Debt + Equity): $9544 million
    • Value of Equity: $7100 million or $65/share
    • 20% margin of safety is $52/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Smuckers.com

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

    Stocks: SJM
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