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.

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%

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

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

• 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

Morningstar.com

Yahoo! Finance

Hormel Foods Corporation

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