Del Monte Foods Company (DLM)

Not necessarily overvalued, but certainly not cheap any more at these levels. It would've been a great buy back in December at $5, but at $9.25, I'm not sure how much upside it has left.

DLM is highly levered. If you ignore the large amount of goodwill on their balance sheet, they have almost no equity when compared to liabilities. Their intangible assets account is likewise very large and mostly consists of the value of their trademark. I won't deny that the Del Monte name has value.

However, from my perspective, the value of trademarks for purposes of a DCF analysis are debatable. What gives the trademark value? Is it the company's cash flows? Or is the company's reputation so great, that even if the company were teetering on the verge of bankruptcy, it would still have value? For Del Monte, I think the answer is a little bit of both. I'd discount their intangibles a little bit, but not much for my analysis (since I'm going red thumb). After that discount, I think you can basically say that Del Monte has 0 equity and their value is totally dependent on the present value of their future cash flows.

Diluted earnings from continuing operations for Del Monte over the past three fiscal years: $0.74, $0.58, and $0.48. Actual earnings have been higher due to discontinued operations. I'd estimate future cash flows to be somewhere between 60 cents per share and $1 per share with a 3% constant growth rate. That gives Del Monte a valuation somewhere between $8 and $14 on my spreadsheet. If I had to take a guess, I'd say this was worth about $10. That's a little bit higher than what it's selling for right now, but not much. Given the huge discounts the market has been putting on equities during the downturn, I'll wager to guess this will underperform the market.

Of course, you might just take all the above as a minor justification of my real reason for red thumbing this: high insider selling.