Current Price: ~ $51/share
Projected Yield: ~ 2.21%
Home Depot is the world's largest home-improvement specialty retailer, operating 2,250 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.
Estimated WACC for the firm today is 9.69% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF
$Millions
|
2003
|
2053
|
2004
|
2439
|
2005
|
2956
|
2006
|
2603
|
2007
|
4119
|
2008
|
2169
|
2009
|
3681
|
2010
|
4159
|
2011
|
3489
|
2012
|
5430
|
Average Annual Growth FCF: ~ 18%
CAGR FCF: ~ 11%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 15% per year
Internal Growth Rate: ~ 6%
Sustainable Growth Rate: ~ 14%
Scenario 1
Average FCF (2012, 2011, 2010) is $4359 million
Average FCF (2012, 2011, 2010) is $4359 million
- Start at $4359 million FCF
- Assume a 5-year growth rate in FCF of 15% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 9.69%, give a present value for the entire firm (Debt + Equity) of $90682 million. If the firm's fair value of debt is estimated at $12100 million, then the fair value of the firm's equity could be $78582 million. $78582 million / 1530 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.
Year
|
FCF
$Millions
|
0
|
4359
|
1
|
5013
|
2
|
5765
|
3
|
6629
|
4
|
7624
|
5
|
8768
|
Terminal
Value
|
104035
|
The firm's future cash flows, discounted at a WACC of 9.69%, give a present value for the entire firm (Debt + Equity) of $90682 million. If the firm's fair value of debt is estimated at $12100 million, then the fair value of the firm's equity could be $78582 million. $78582 million / 1530 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 11% per year, then 4% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
4359
|
1
|
4838
|
2
|
5371
|
3
|
5962
|
4
|
6617
|
5
|
7345
|
Terminal
Value
|
143248
|
- Present Value of the entire firm (Debt + Equity): $112791 million
- Value of Equity: $10691 million or $66/share
- 20% margin of safety is $53/share
Sources
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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