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Procter & Gamble Co: Cash Flow Valuation Update

|Includes: The Procter & Gamble Company (PG)

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

Morningstar.com

Yahoo! Finance

PG.com

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