Yield: ~ 1.52%
Hormel Foods Corporation is engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally.
Estimated WACC for the firm today is 9.03% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Average Annual Growth FCF: ~ 25%
Year
|
FCF $Millions
|
2004
|
214
|
2005
|
322
|
2006
|
185
|
2007
|
211
|
2008
|
146
|
2009
|
454
|
2010
|
396
|
2011
|
394
|
2012
|
385
|
2013
|
531
|
Average Annual Growth FCF: ~ 25%
CAGR FCF: ~ 11%
Consensus Forecast Industry 5-Year Growth: ~ 13.6% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
Internal Growth Rate: ~ 7.8%
Sustainable Growth Rate: ~ 12.6%
Scenario 1
Average FCF (2013 - 2009) is $432 million
Average FCF (2013 - 2009) is $432 million
- Start at $432 million FCF
- Assume a 5-year growth rate in FCF of 11% 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 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.
Year
|
FCF $Millions
|
0
|
432
|
1
|
480
|
2
|
532
|
3
|
591
|
4
|
656
|
5
|
728
|
Terminal Value
|
8948
|
The firm's future free cash flows, discounted at a WACC of 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 11% per year, then 3.75% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF $Millions
|
0
|
432
|
1
|
480
|
2
|
532
|
3
|
591
|
4
|
656
|
5
|
728
|
Terminal Value
|
15303
|
- Present Value of the entire firm (Debt + Equity): $12212 million
- Value of Equity: $11950 million or $45/share
- 20% margin of safety is $36/share
Conclusion: Closing out position in HRL for my Fantasy Portfolio today; looking for better value
Sources
Disclosure: I have no real positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.