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# Intrinsic Calculation For Hormel Foods Corporation (NYSE:HRL) Shows Investors Are Overpaying

In this article I am going to calculate the intrinsic value of Hormel Foods Corporation (NYSE:HRL) by taking the foreast future cash flows of the company and discounting them back to todayâ€™s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.

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### The method

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the companyâ€™s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

#### 5-year cash flow estimate

 2019 2020 2021 2022 2023 Levered FCF (\$, Millions) \$837.24 \$1.00k \$1.12k \$1.12k \$1.13k Source Analyst x5 Analyst x4 Analyst x2 Est @ 0.71% Est @ 0.71% Present Value Discounted @ 8.55% \$771.32 \$851.98 \$873.40 \$810.32 \$751.79

Present Value of 5-year Cash Flow (PVCF)= US\$4.1b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.7%. We discount this to todayâ€™s value at a cost of equity of 8.5%.

Terminal Value (TV) = FCF2023 Ã— (1 + g) Ã· (r â€“ g) = US\$1.1b Ã— (1 + 2.7%) Ã· (8.5% â€“ 2.7%) = US\$20b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US\$20b Ã· ( 1 + 8.5%)5 = US\$13b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US\$17b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of \$32.43. Relative to the current share price of \$42.71, the stock is rather overvalued at the time of writing.

### The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You donâ€™t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Hormel Foods as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation Iâ€™ve used 8.5%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

### Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldnâ€™t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For HRL, Iâ€™ve put together three relevant aspects you should further research:

1. Financial Health: Does HRL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does HRLâ€™s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of HRL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.