Tuesday, February 7, 2012

Hormel Foods Corporation: $HRL Cash Flow Valuation


Current Price: ~ $29/share
Projected Yield: ~ 2.07%




Hormel Foods manufactures and distributes value-added meat products consisting primarily of pork and turkey. A large portion of the company's revenue comes from fresh meats (55% of sales in fiscal 2011) such as sausage, ham, and bacon, as well as turkey (19%) and shelf-stable products (17%) including frozen meals, Spam, and canned chili. The firm's most notable brands include Hormel, Spam, Jennie-O Turkey Store, Lloyd's, and Chi-Chi's.         


Estimated WACC for the firm today is 4.91% 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
262
2003
12
2004
214
2005
322
2006
185
2007
211
2008
146
2009
454
2010
396
2011
394


Average Annual Growth FCF: ~ 197%
CAGR FCF: ~ 5%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 9%
Sustainable Growth Rate: ~ 15%

Scenario 1

  • Start at $394 million FCF
  • 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
394
1
433
2
477
3
524
4
577
5
635
Terminal Value
14202


The firm's future cash flows, discounted at a WACC of 4.91%, give a present value for the entire firm (Debt + Equity) of $13449 million. If the firm's fair value of debt is estimated at $267 million, then the fair value of the firm's equity could be $13182 million.  $13182 million / 264 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.


Scenario 2
All else being equal,

  • 5-year growth rate in FCF of 5% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
394
1
414
2
434
3
456
4
479
5
503
Terminal Value
10743



  • Present Value of the entire firm (Debt + Equity): $10427 million
  • Value of Equity: $10160 million or $38/share
  • 20% margin of safety is $30/share


Scenario 3
All else being equal,

  • Discount the firm's future cash flows at a WACC of 8%
  • 5-year growth rate in FCF of 10% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
394
1
433
2
477
3
524
4
577
5
635
Terminal Value
8725


  • Present Value of the entire firm (Debt + Equity): $8020 million
  • Value of Equity: $7753 million or $29/share
  • 20% margin of safety is $23/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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