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
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.
|
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,
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
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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