Friday, November 30, 2012

Costco Wholesale Corp: $COST Cash Flow Valuation Update


Current Price: ~ $104/share
Yield: ~ 1.02%


As of August, Costco Wholesale Corporation operates 439 membership warehouse clubs in the United States, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, nine in Taiwan, eight in Korea and three in Australia. The base and executive membership cost $55 and $110 per year, respectively. The company sells food, fuel, and general merchandise to its members but derives most of its profits from membership fees.

Estimated WACC for the firm today is 5.96% 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
697
2004
1393
2005
788
2006
615
2007
691
2008
578
2009
842
2010
1725
2011
1908
2012
1577




Average Annual Growth FCF: ~ 19%
CAGR FCF: ~ 9.5%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 12% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 11.5%

Scenario 1
The company generated $1577 million FCF in 2012
  • Start at $1577 million FCF
  • Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1577
1
1766
2
1978
3
2216
4
2481
5
2779
Terminal Value
52241


The firm's future free cash flows, discounted at a WACC of 5.96%, give a present value for the entire firm (Debt + Equity) of $48455 million. If the firm's fair value of debt is estimated at $5163 million, then the fair value of the firm's equity could be $43292 million.  $43292 million / 432 million outstanding shares is approximately $100 per share and a 20% margin of safety is $80/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 9.50% per year, then 2% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1577
1
1727
2
1891
3
2070
4
2267
5
2483
Terminal Value
68674


  • Present Value of the entire firm (Debt + Equity): $60130 million
  • Value of Equity: $54967 million or $127/share
  • 20% margin of safety is $102/share


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

Cisco Systems Inc: $CSCO Cash Flow Valuation Update


Current Price: ~ $19/share
Yield: ~ 2.31%

Cisco Systems is the world's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as video conferencing, web-based collaboration, and data center servers.

Estimated WACC for the firm today is 12.51% 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
4523
2004
6508
2005
6876
2006
7127
2007
8853
2008
10821
2009
8892
2010
9165
2011
8905
2012
10365




Average Annual Growth FCF: ~ 11%
CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
Internal Growth Rate: ~ 7%
Sustainable Growth Rate: ~ 14%

Scenario 1
Average FCF (2012, 2011, 2010) is $9478 million
  • Start at $9478 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
Year
FCF $Millions
0
9478
1
10236
2
11055
3
11940
4
12895
5
13926
Terminal Value
120271


The firm's future free cash flows, discounted at a WACC of 12.51%, give a present value for the entire firm (Debt + Equity) of $108717 million. If the firm's fair value of debt is estimated at $18700 million, then the fair value of the firm's equity could be $90017 million.  $90017 million / 5310 million outstanding shares is approximately $17 per share and a 20% margin of safety is $14/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 8% per year, then 4.50% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
9478
1
10236
2
11055
3
11940
4
12895
5
13926
Terminal Value
187877


  • Present Value of the entire firm (Debt + Equity): $146225 million
  • Value of Equity: $127525 million or $24/share
  • 20% margin of safety is $19/share

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

Campbell Soup Co: $CPB Cash Flow Valuation Update


Current Price: ~ $37/share
Yield: ~ 3.17%


With a heritage that dates back about 140 years, Campbell Soup is now a leading global manufacturer and marketer of branded convenience food products, most notably soup. However, the firm's product assortment spans beyond soup, as its portfolio of well-known brands includes Campbell's, Pace, Prego, Swanson, V8, and Pepperidge Farm. International operations account for around 30% of Campbell's consolidated sales.     


Estimated WACC for the firm today is 4.25% 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
590
2004
456
2005
658
2006
917
2007
340
2008
468
2009
821
2010
742
2011
870
2012
797



Average Annual Growth FCF: ~ 12%
CAGR FCF: ~ 3%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 5% per year
Internal Growth Rate: ~ 6%

Scenario 1
Average the high and low FCF of the past 5 years; Average FCF (2011, 2008) is $669 million
  • Start at $669 million FCF
  • Assume a 5-year growth rate in FCF of 3% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
669
1
689
2
710
3
731
4
753
5
776
Terminal Value
18799


The firm's future free cash flows, discounted at a WACC of 4.25%, give a present value for the entire firm (Debt + Equity) of $18494 million. If the firm's fair value of debt is estimated at $2663 million, then the fair value of the firm's equity could be $15831 million.  $15831 million / 314 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.


Scenario 2
Average FCF (2012, 2011, 2010) is $803 million
  • Start at $803 million FCF
  • Assume a higher WACC of 6.25%
  • Assume a 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
803
1
843
2
885
3
930
4
976
5
1025
Terminal Value
17218


All else being equal,
  • Present Value of the entire firm (Debt + Equity): $16591 million
  • Value of Equity: $13928 million or $44/share
  • 20% margin of safety is $35/share


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