Current Price: ~ $67/share

Yield: ~ 3.24%

Since its founding in 1837, Procter & Gamble has become the world's largest consumer product manufacturer. The firm operates with a lineup of leading brands, including 25 that generate more than $1 billion in annual global sales such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, and Iams pet food. P&G recently sold its last remaining food brand, Pringles, to Kellogg. Sales outside of the U.S.

Estimated WACC for the firm today is 4.70% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2003 | 7218 |

2004 | 7338 |

2005 | 6541 |

2006 | 8708 |

2007 | 10490 |

2008 | 12768 |

2009 | 11681 |

2010 | 13005 |

2011 | 9925 |

2012 | 9320 |

Average Annual Growth FCF: ~ 4%

CAGR FCF: ~ 3%

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

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

Internal Growth Rate: ~ 3%

Sustainable Growth Rate: ~ 7%

**Scenario 1**

- Start at $9320 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

Year | FCF $Millions |

0 | 9320 |

1 | 10066 |

2 | 10871 |

3 | 11741 |

4 | 12680 |

5 | 13694 |

Terminal Value | 314357 |

The firm's future free cash flows, discounted at a WACC of 4.70%, give a present value for the entire firm (Debt + Equity) of $300988 million. If the firm's fair value of debt is estimated at $30148 million, then the fair value of the firm's equity could be $270840 million. $270840 million / 2810 million outstanding shares is approximately $96 per share and a 20% margin of safety is $77/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 4% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 9320 |

1 | 9693 |

2 | 10081 |

3 | 10484 |

4 | 10903 |

5 | 11339 |

Terminal Value | 250658 |

- Present Value of the entire firm (Debt + Equity): $244849 million
- Value of Equity: $214701 million or $76/share
- 20% margin of safety is $61/share

Sources

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