USD 28.55 as of today(2019-10-15). HRL Intrinsic Value: DCF (FCF Based) explanation, calculation, historical data and more" />HRL Intrinsic Value: DCF (FCF Based) | Hormel Foods - GuruFocus.com
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Hormel Foods Intrinsic Value: DCF (FCF Based)

: USD 28.55 (As of Today)
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As of today (2019-10-15), Hormel Foods's intrinsic value calculated from the Discounted Cash Flow model is USD 28.55.

Note: Discounted Cash Flow model is only suitable for predictable companies (Business Predictability Rank higher than 1-Star). Result may not be accurate due to the low predictability of business.

Margin of Safety (FCF Based) using Discounted Cash Flow model for Hormel Foods is -43.63%.


Hormel Foods Intrinsic Value: DCF (FCF Based) 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
Intrinsic Value: DCF (FCF Based) Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 15.04 25.01 16.29 18.93 24.32

Hormel Foods Quarterly Data
Oct14 Jan15 Apr15 Jul15 Oct15 Jan16 Apr16 Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Jul18 Oct18 Jan19 Apr19 Jul19
Intrinsic Value: DCF (FCF Based) 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 20.85 24.32 21.35 23.57 21.97

Hormel Foods Intrinsic Value: DCF (FCF Based) Calculation

This is the intrinsic value calculated from the Discounted Cash Flow model with default parameters. In a discounted cash flow model, the future cash flow is estimated based on a cash flow growth rate and a discount rate. The cash flow of the future is discounted to its current value at the discount rate. All of the discounted future cash flow is added together to get the current intrinsic value of the company.

Usually a two-stage model is used when calculating a stock's intrinsic value using a discounted cash flow model. The first stage is called the growth stage; the second is called the terminal stage. In the growth stage the company grows at a faster rate. Because it cannot grow at that rate forever, a lower rate is used for the terminal stage.

GuruFocus DCF calculator is a two-stage model. The default values are defined as:

1. Discount Rate: d=12%

2. Growth Rate in the growth stage: g1=14.80%
Growth Rate in the growth stage = average free cash flow growth rate in the past 10 years. If it is higher than 20%, we use 20%. If it is less than 5%, we use 5% instead. => Average Free Cash Flow Growth Rate in the past 10 years was 14.80% which is less than 20% and higher than 5% => Growth Rate: 14.80%

3. Years of Growth Stage: y1=10

4. Terminal Growth Rate: g2=4%

5. Years of Terminal Growth: y2=10

6. Free Cash Flow per Share: fcf=USD 1.414.
However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the Earnings Per Share without NRI is used as the default. The reason we are doing this is we found that historically stock prices are more correlated with earnings than free cash flow.

All of the default settings can be changed and the results are calculated automatically.

Hormel Foods's Intrinsic Value: DCF (FCF Based) for today is calculated as

DCF (FCF Based)=Free Cash Flow per Share*{[(1+g1)/(1+d)+(1+g1)^2/(1+d)^2+...+(1+g1)^10/(1+d)^10]
+(1+g1)^10/(1+d)^10*[(1+g2)/(1+d)+(1+g2)^2/(1+d)^2+...+(1+g2)^10/(1+d)^10]}

set x = (1+g1)/(1+d) = (1+{g1})/(1+0.12) = 1.025
and y = (1+g2)/(1+d) = (1+0.04)/(1+0.12) = 0.928571428571

DCF (FCF Based)=Free Cash Flow per Share*{[x+x^2+...+x^10]+x^10*[y+y^2+...+y^10]}
=Free Cash Flow per Share*[x*(1-x^10)/(1-x)+x^10*y*(1-y^10)/(1-y)]
=1.414*20.1934
=28.55

Margin of Safety (FCF Based)=(DCF (FCF Based)-Current Price)/DCF (FCF Based)
=(28.5534676-41.01)/28.5534676
=-43.63 %

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


Hormel Foods  (NYSE:HRL) Intrinsic Value: DCF (FCF Based) Explanation

Unlike valuation methods such as Net Current Asset Value, Tangible Book Value per Share, Graham Number, Median Ratio etc, discounted Cash Flow model evaluates the companies based on their future earnings power instead of their assets.


Be Aware

What you need to know about the DCF model:

1. The DCF model evaluates a company based on its future earnings power
2. Growth is taken into account; therefore a faster growth company is worth more if everything else is the same.
3. Since we are projecting future growth, it is assumed that the company will grow at the same rate as it did during the past 10 years. Therefore this model works better for the companies that have relatively consistent performance.
4. The DCF model works poorly for inconsistent performers such as cyclicals.
5. What discount rate should you use? Your expected return from the investment is a good discount rate assumption.
6. A larger margin of safety should be required for companies with less predictable businesses.

You can screen for stocks that trade below their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) with the GuruFocus All-in-One Screener. Companies with a high Predictability Rank that trade at a discount to their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) can be found in the screen of Undervalued Predictable Companies.


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