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 5Year Growth: ~ 13.6% per year
Consensus Forecast Company 5Year 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 5year 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 5year 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.