Stock Analysis on Net
Stock Analysis on Net

Home Depot Inc. (NYSE:HD)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Home Depot Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.63%
01 FCFE0 18,670
1 FCFE1 116,004 = 18,670 × (1 + 521.34%) 102,085
2 FCFE2 572,095 = 116,004 × (1 + 393.17%) 443,042
3 FCFE3 2,088,140 = 572,095 × (1 + 265.00%) 1,423,063
4 FCFE4 4,945,318 = 2,088,140 × (1 + 136.83%) 2,965,835
5 FCFE5 5,373,528 = 4,945,318 × (1 + 8.66%) 2,835,963
5 Terminal value (TV5) 117,339,014 = 5,373,528 × (1 + 8.66%) ÷ (13.63% – 8.66%) 61,927,479
Intrinsic value of Home Depot Inc. common stock 69,697,467
 
Intrinsic value of Home Depot Inc. common stock (per share) $70,168.06
Current share price $410.44

Based on: 10-K (reporting date: 2024-01-28).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.69%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of Home Depot Inc. common stock βHD 0.98
 
Required rate of return on Home Depot Inc. common stock3 rHD 13.63%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rHD = RF + βHD [E(RM) – RF]
= 4.69% + 0.98 [13.79% – 4.69%]
= 13.63%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Home Depot Inc., PRAT model

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Average Jan 28, 2024 Jan 29, 2023 Jan 30, 2022 Jan 31, 2021 Feb 2, 2020 Feb 3, 2019
Selected Financial Data (US$ in millions)
Cash dividends 8,383 7,789 6,985 6,451 5,958 4,704
Net earnings 15,143 17,105 16,433 12,866 11,242 11,121
Net sales 152,669 157,403 151,157 132,110 110,225 108,203
Total assets 76,530 76,445 71,876 70,581 51,236 44,003
Stockholders’ equity (deficit) 1,044 1,562 (1,696) 3,299 (3,116) (1,878)
Financial Ratios
Retention rate1 0.45 0.54 0.57 0.50 0.47 0.58
Profit margin2 9.92% 10.87% 10.87% 9.74% 10.20% 10.28%
Asset turnover3 1.99 2.06 2.10 1.87 2.15 2.46
Financial leverage4 73.30 48.94 — 21.39 — —
Averages
Retention rate 0.52
Profit margin 10.31%
Asset turnover 2.04
Financial leverage 47.88
 
FCFE growth rate (g)5 521.34%

Based on: 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31), 10-K (reporting date: 2020-02-02), 10-K (reporting date: 2019-02-03).

2024 Calculations

1 Retention rate = (Net earnings – Cash dividends) ÷ Net earnings
= (15,143 – 8,383) ÷ 15,143
= 0.45

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 15,143 ÷ 152,669
= 9.92%

3 Asset turnover = Net sales ÷ Total assets
= 152,669 ÷ 76,530
= 1.99

4 Financial leverage = Total assets ÷ Stockholders’ equity (deficit)
= 76,530 ÷ 1,044
= 73.30

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.52 × 10.31% × 2.04 × 47.88
= 521.34%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (407,687 × 13.63% – 18,670) ÷ (407,687 + 18,670)
= 8.66%

where:
Equity market value0 = current market value of Home Depot Inc. common stock (US$ in millions)
FCFE0 = the last year Home Depot Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Home Depot Inc. common stock

FCFE growth rate (g) forecast

Home Depot Inc., H-model

Microsoft Excel
Year Value gt
1 g1 521.34%
2 g2 393.17%
3 g3 265.00%
4 g4 136.83%
5 and thereafter g5 8.66%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 521.34% + (8.66% – 521.34%) × (2 – 1) ÷ (5 – 1)
= 393.17%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 521.34% + (8.66% – 521.34%) × (3 – 1) ÷ (5 – 1)
= 265.00%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 521.34% + (8.66% – 521.34%) × (4 – 1) ÷ (5 – 1)
= 136.83%