Thursday, December 19, 2013

Hormel Foods Corporation: $HRL Cash Flow Valuation Update

Current Price: ~ $45/share
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.


       Skippy® brand SPAM® BrandFarmer John® meat products

Jennie-O Turkey Store® products Dinty Moore® stewHormel® chiliLa Victoria® Mexican products
        
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:

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
  • 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
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,
  • 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.

Monday, December 16, 2013

Closing Out Applied Materials Inc: $AMAT Cash Flow Valuation Update

Current Price: ~ $17/share
Yield: ~ 2.34%


Applied Materials, Inc., provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic and related industries.


        
          

Estimated WACC for the firm today is 17.31% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2004
1437
2005
1047
2006
1756
2007
1945
2008
1423
2009
84
2010
1554
2011
2217
2012
1689
2013
426



Average Annual Growth FCF: ~ 180.5%
CAGR FCF: ~ -12.64%
Consensus Forecast Industry 5-Year Growth: ~ 17% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
Internal Growth Rate: ~ -1.7%
Sustainable Growth Rate: ~ -2.81%

Scenario 1
Average FCF (2013-2011) is $1444 million
  • Start at $1444 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
1444
1
1560
2
1684
3
1819
4
1965
5
2122
Terminal Value
13235

The firm's future free cash flows, discounted at a WACC of 17.31%, give a present value for the entire firm (Debt + Equity) of $11629 million. If the firm's fair value of debt is estimated at $2100 million, then the fair value of the firm's equity could be $9529 million.  $9529 million / 1200 million outstanding shares is approximately $8 per share and a 20% margin of safety is $6.40/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 12.00% per year, then 9.50% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1444
1
1617
2
1811
3
2029
4
2272
5
2545
Terminal Value
36480
  • Present Value of the entire firm (Debt + Equity): $22715 million
  • Value of Equity: $20615 million or $17/share
  • 20% margin of safety is $13.60/share


Conclusion: Closing out position in AMAT for my Fantasy Portfolio today.

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