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,
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,
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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