Buffett says Kraft should not issue stocks
Bill Ackman today said that Pershing Square has bought 2% of Kraft Foods Inc (ticker: KFT) stock. Bill Ackman agrees with Warren Buffett in that Kraft should not be issuing stock to acquire Cadbury plc (ticker: CBY). Fortunately Cadbury seems to want cash, not stock so this deal could still go through in a manner that both Ackman and Buffett would view as more favorable to shareholders.
Over the past 12 months (trailing twelve months) Kraft has seen its free cash flow jump to about $3.6 billion from an average of about $2.5 million over the pa
st 5 years. If FCF is to grow at 8% for 10 years and 4% for the 10 years after that, it can be concluded via a DCF calculation that Kraft is worth about $52 per share. This assumes that those future free cash flows are discounted to current value at a rate of 9%. This valuation also assumes total equity of $22 billion. With Kraft trading at about $30 per share, a value of $52 per share represents a discount to intrinsic value of just over 40%.
Warren Buffett owns 9.7% of all Kraft outstanding. On January 18, Ackman stated that he expects to formally disclose his holding in a filing with U.K. Regulators. Other gurus holding Kraft include Jean-Marie Eveillard, HOTCHKIS & WILEY, Prem Watsa, Brian Rogers, Richard Pzena and NWQ Managers.
