Thursday, January 26, 2012

HJ Heinz Company: $HNZ cash flow valuation update

Current Price: ~ $52/share
Projected Yield: ~ 3.67%




Since its founding more than 110 years ago, H.J. Heinz has grown into a globally diversified manufacturer and marketer of packaged foods, selling through grocery stores, convenience stores, and food-service distributors. Its products include ketchup, condiments, sauces, frozen food, soups, beans, pasta meals, infant nutrition, and others; its namesake brand accounts for about 40% of annual sales. International sales account for 60% of the firm's consolidated total.         


I estimated the firm's WACC today at 6.19% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2002
678
2003
854
2004
1017
2005
948
2006
858
2007
851
2008
887
2009
875
2010
985
2011
1248
TTM
960

Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
Internal Growth Rate: ~ 4%
Sustainable Growth Rate: ~ 19%

Average FCF (2011, 2010, 2009) is $1036 million.  Starting at $1036 million FCF, assuming the company achieves a 5-year growth rate in FCF of 8% per year, and assuming that after the next five years, the company achieves no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1036
1
1119
2
1208
3
1305
4
1409
5
1522
Terminal Value
26551

The firm's future cash flows, discounted at a WACC of 6.19%, give a present value for the entire firm (Debt + Equity) of $25113 million. If the firm's fair value of debt is estimated at $5000 million, then the fair value of the firm's equity could be $20113 million.  $20113 million / 320 million outstanding shares is approximately $63 per share and a 20% margin of safety is $50/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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