Wednesday, October 5, 2011

Procter & Gamble: $PG cash flow valuation update


Current Price: ~ $63/share
Projected Yield: ~ 3.31%


Since its founding in 1837, Procter & Gamble has become the world's largest consumer product manufacturer, with a lineup of famous brands. The brands are sold through three global business units, and include Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, and Iams pet food. Since 2001, the company has doubled the sales it derives from developing markets, acquired and integrated Wella and Gillette, and sold its pharmaceutical and coffee businesses.

I estimated the firm's WACC today at 6.31% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year
FCF $Millions
2002
6063
2003
7218
2004
7338
2005
6541
2006
8708
2007
10490
2008
12768
2009
11681
2010
13005
2011
9925

Average Annual Growth FCF: ~ 7%
CAGR FCF: ~ 6%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year

Starting at $9925 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
9925
1
10818
2
11792
3
12853
4
14010
5
15271
Terminal Value
263699

The firm's future cash flows, discounted at a WACC of 6.31%, give a present value for the entire firm (Debt + Equity) of $247,693 million. If the firm's fair value of debt is estimated at $35,400 million, then the fair value of the firm's equity could be $212,293 million.  $212,293 million / 2750 million outstanding shares is approximately $77 per share and a 20% margin of safety is $62/share.

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

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