Projected Yield: ~ 2.65%
Home Depot is the world's largest home-improvement specialty retailer, operating 2,246 warehouse-format stores throughout the United States, Canada, Mexico, and China. The company's stores offer products and services for home construction, renovation, remodeling, and maintenance. The firm is based in Atlanta and employs more than 300,000 people.
I estimated the firm's WACC today at 8.89% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF
$Millions
|
2002
|
2570
|
2003
|
2053
|
2004
|
2439
|
2005
|
2956
|
2006
|
2603
|
2007
|
4119
|
2008
|
2169
|
2009
|
3681
|
2010
|
4159
|
2011
|
3489
|
TTM
|
5063
|
Average Annual Growth FCF: ~ 9%
CAGR FCF: ~ 3%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 14% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 10%
Scenario 1
Average FCF (TTM, 2011) is $4276 million. Starting at $4276 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and assuming that after the next five years, the company achieves no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
4276
|
1
|
4875
|
2
|
5557
|
3
|
6335
|
4
|
7222
|
5
|
8233
|
Terminal
Value
|
105590
|
The firm's future cash flows, discounted at a WACC of 8.89%, give a present value for the entire firm (Debt + Equity) of $93563 million. If the firm's fair value of debt is estimated at $12000 million, then the fair value of the firm's equity could be $81563 million. $81563 million / 1540 million outstanding shares is approximately $53 per share and a 20% margin of safety is $42/share.
Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 7% per year, then growth in FCF of 2% per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
4276
|
1
|
4575
|
2
|
4896
|
3
|
5238
|
4
|
5605
|
5
|
5997
|
Terminal
Value
|
93153
|
The firm's future cash flows, discounted at a WACC of 8.89%, give a present value for the entire firm (Debt + Equity) of $81145 million. If the firm's fair value of debt is estimated at $12000 million, then the fair value of the firm's equity could be $69145 million. $69145 million / 1540 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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