USD 16.93 as of today(2019-10-21). HRL Earnings Power Value (EPV) explanation, calculation, historical data and more" />HRL Earnings Power Value (EPV) | Hormel Foods - GuruFocus.com
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Hormel Foods Earnings Power Value (EPV)

: USD 16.93 (As of Jul19)
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As of Jul19, Hormel Foods's earnings power value is USD 16.93. *

* GuruFocus does not store EPV value into our database if Average Maintenance CAPEX is 0.

Margin of Safety is -140.51

The basic concept of EPV is that one should value a stock based on the current free cash flow of a company and not on future projections which may, or may not, come true. It is arguably a better way to analyze stocks than Discounted Cash Flow analysis that relies on highly speculative growth assumptions many years into the future. Assumption: Current profitability is sustainable.


Hormel Foods Earnings Power Value (EPV) Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

* Premium members only.

Hormel Foods Annual Data
Oct09 Oct10 Oct11 Oct12 Oct13 Oct14 Oct15 Oct16 Oct17 Oct18
Earnings Power Value (EPV) Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 10.97 11.73 13.31 14.73 14.93

Hormel Foods Quarterly Data
Oct14 Jan15 Apr15 Jul15 Oct15 Jan16 Apr16 Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Jul18 Oct18 Jan19 Apr19 Jul19
Earnings Power Value (EPV) Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 14.32 14.93 15.35 16.83 16.93

Competitive Comparison
* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap.


Hormel Foods Earnings Power Value (EPV) Distribution

* The bar in red indicates where Hormel Foods's Earnings Power Value (EPV) falls into.



Hormel Foods Earnings Power Value (EPV) Calculation

Earnings Power Value also known as just Earnings Power is a valuation technique popularised by Bruce Greenwald, an authority on value investing at Columbia University. It is arguably a better way to analyze stocks than Discounted Cash Flow analysis that relies on highly speculative growth assumptions many years into the future.

The basic concept of EPV is that one should value a stock based on the current free cash flow of a company and not on future projections which may, or may not, come true. This valuation tool excludes the potential growth that a company may have so that needs to be looked at separately. Since future growth is excluded from the analysis, only the maintenance capital expenditures are subtracted from after-tax EBIT (earnings before interest and taxes) and growth capex is ignored.

Hormel Foods's "Earning Power" Calculation:

Average of Last 20 Quarters Last Quarter
Revenue 9,408
DDA 143
Operating Margin % 12.45
SGA * 25% 196
Tax Rate % 27.59
Maintenance Capex 210
Cash and Cash Equivalents 574
Short-Term Debt 0
Long-Term Debt 250
Shares Outstanding (Diluted) 544

1. Start with "Earnings" not including accounting adjustments (one-time charges not excluded unless policy has changed). "Earnings" are "Operating Income.

2. Look at average margins over a business/Industry cycle: Average Operating Margin = 12.45%

To normalize margins and eliminate the effects on profitability of valuing the firm at different points in the business cycle, it is usually best to take a long-term average of operating margins. Ideally this would be as long as 10 years and include at least one economic downturn. However, since most of companies do not have as long as 10-year history, here GuruFocus uses the latest 5 years data to do the calculation. To smooth out unusual years but reflect recent developments, we take an average of the 5 year margin.

3. Multiply average margins by sustainable revenues and then adjust for maintenance SGA. This yields "normalized" EBIT:

To be conservative, GuruFocus uses an average of the 5 year revenues as the sustainable revenue.
EPV analysis recognises that part of SG&A expenditure is made to maintain and replace the existing assets, while part is made to grow sales. Since EPV is only interested in what it costs a going concern to maintain its existing asset base, it adds back a percentage of SG&A (between 15% and 50% - this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for. To start off, we assume 25% for the sake of prudence.
Sustainable Revenue = USD Mil, Average Operating Margin = 12.45%, Average Adjusted SGA = 196,
therefore "Normalized" EBIT = Sustainable Revenue * Average Operating Margin + Average Adjusted SGA = 9,408 * 12.45% +196 = USD 1367.33893749 Mil.

4. Multiply by one minus Average Tax Rate (NOPAT):

Same as average operating margin calculation, GuruFocus takes an average of the 5 years tax rates.
Average Tax Rate = 27.59%, and "Normalized" EBIT = USD 1367.33893749 Mil,
therefore After-tax "Normalized" EBIT = "Normalized" EBIT * ( 1 - Average Tax Rate ) = 1367.33893749 * ( 1 - 27.59% ) = USD 990.151654892 Mil.

5. Add back Excess Depreciation (after tax at 1/2 average tax rate). This yields "normalized" Earnings:

Excess Depreciation = Average DDA * % of Excess Depreciation (after tax at 1/2 average tax rate) = 143 * 0.5 * 27.59% = USD 19.678447451 Mil.
"Normalized" Earnings = After-tax "Normalized" EBIT + Excess Depreciation = 990.151654892 + 19.678447451 = USD 1009.83010234 Mil.

6. Adjusted for Maintenance Capital Expenditure:

First, calculate the revenue change regarding to the previous year. If the revenue decreased from the previous year, then the Maintenance Capital Expenditure = Capital Expenditure (positive).
Second, if the revenue increased from the previous year, then calculate the percentage of Net PPE as of corresponding Revenue.
Third, calculate Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase.
If [Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase] was negative, then the Maintenance Capital Expenditure = Capital Expenditure (positive).
If [Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase] was positive, then the Maintenance Capital Expenditure = Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase.
Fourth, GuruFocus uses an average of the 5 year maintenance capital expenditures as maintenance CAPEX.
Hormel Foods's Average Maintenance CAPEX = USD 210 Mil *.
* GuruFocus does not store EPV value into our database if Average Maintenance CAPEX is 0.

7. Investors require a return of "WACC" for the risk they are taking: WACC = 9%

8. Hormel Foods's current cash and cash equivalent = USD 574 Mil.
Hormel Foods's current interest bearing debt = Long-Term Debt & Capital Lease Obligation + Short-Term Debt & Capital Lease Obligation = 250 + 0 = USD 250 Mil.
Hormel Foods's current Shares Outstanding (Diluted Average) = 544 Mil.

Hormel Foods's Earnings Power Value (EPV) for Jul19 is calculated as:

EPV = ( ( Norm. Earnings-Maint. CAPEX *) / WACC + CashandEquiv - Int. Bearing Debt ) / Shares Outstanding (Diluted Average)
= ( ( 1009.83010234 - 210)/ 9%+574-250 )/544
=16.93

Margin of Safety (EPV)=( Earnings Power Value (EPV)-Current Price )/Earnings Power Value (EPV)
=( 16.9346106487-40.73 )/16.9346106487
= -140.51%

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

* GuruFocus does not store EPV value into our database if Average Maintenance CAPEX is 0.


Hormel Foods  (NYSE:HRL) Earnings Power Value (EPV) Explanation

Assumption: Current profitability is sustainable.

Earnings power value (EPV) uses a very basic equation which assumes no growth, although it does rely on an assumption about the cost of capital as well as the fact that current earnings are sustainable. It also involves several adjustments to clean up the underlying Earnings figures.


Be Aware

Though using today's earnings in calculating Earnings Power Value, GuruFocus is normalizing these earnings to the business cycle. This eliminates the effects on profitability of valuing the firm at different points in the business cycle. This means that we are considering the average earnings over 5 years.


Hormel Foods Earnings Power Value (EPV) Related Terms


Hormel Foods Earnings Power Value (EPV) Headlines

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