Darden Restaurants Inc: $DRI Cash Flow Valuation

Current Price: ~ $52/share
Yield: ~ 3.43%


With a portfolio of almost 1,800 locations, Darden Restaurants is among the leading casual dining restaurant companies in North America. Olive Garden (710 units) and Red Lobster (692) are the firm's flagship chains, while more emergent concepts include Bahama Breeze (24) and Seasons 52 (9). The August 2007 acquisition of RARE Hospitality added LongHorn Steakhouse (326) and The Capital Grille (40) to Darden's portfolio.        

Estimated WACC for the firm today is 7.36% 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	86
2004	171
2005	254
2006	379
2007	261
2008	305
2009	247
2010	464
2011	345
2012	123

Average Annual Growth FCF: ~ 18%

CAGR FCF: ~ 4%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Internal Growth Rate: ~ 4.5%

Sustainable Growth Rate: ~ 15%

Scenario 1
Average FCF (2012, 2011, 2010) is $311 million

• Start at $311 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	311
1	348
2	390
3	437
4	489
5	548
Terminal Value	8344

The firm's future free cash flows, discounted at a WACC of 7.36%, give a present value for the entire firm (Debt + Equity) of $7620 million. If the firm's fair value of debt is estimated at $1806 million, then the fair value of the firm's equity could be $5814 million.  $5814 million / 129 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 6% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	311
1	330
2	349
3	370
4	393
5	416
Terminal Value	10126

• Present Value of the entire firm (Debt + Equity): $8598 million
• Value of Equity: $6792 million or $53/share
• 20% margin of safety is $42/share

Sources

Morningstar.com

Yahoo! Finance

Darden.com

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

Paychex Inc: $PAYX Cash Flow Valuation Update

Current Price: ~ $33/share
Yield: ~ 3.85%


Paychex competes in the payroll outsourcing industry. It is the second-largest player in terms of revenue and focuses on providing this service to small and medium-size business (50-100 employees). Paychex was created from the consolidation of 17 payroll processors in 1979 and services about 550,000 clients. The firm has 12,500 employees and is based in Rochester, N.Y.           

Estimated WACC for the firm today is 10.11% 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	313
2004	340
2005	397
2006	488
2007	552
2008	642
2009	624
2010	538
2011	615
2012	617

Average Annual Growth FCF: ~ 8%

CAGR FCF: ~ 8%

Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 1.5%

Sustainable Growth Rate: ~ 6%

Scenario 1
Average FCF (2012, 2011, 2010) is $590 million

• Start at $590 million FCF
• Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	590
1	649
2	714
3	785
4	864
5	950
Terminal Value	10338

The firm's future free cash flows, discounted at a WACC of 10.11%, give a present value for the entire firm (Debt + Equity) of $9329 million. The firm has no debt and $9329 million / 363 million outstanding shares is approximately $26 per share.  A 20% margin of safety is $21/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 8% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	590
1	637
2	688
3	743
4	803
5	867
Terminal Value	15323

• Present Value of the entire firm (Debt + Equity): $12252 million
• Value of Equity: $12252 million or $34/share
• 20% margin of safety is $27/share

Sources

Morningstar.com

Yahoo! Finance

Paychex.com

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

Procter & Gamble Co: $PG Cash Flow Valuation Update

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

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,

• 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

Morningstar.com

Yahoo! Finance

PG.com

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