Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Home Depot Inc: Cash Flow Valuation Update

|Includes: Home Depot, Inc. (HD)

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

  • 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

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,

  • 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

Morningstar.com

Yahoo! Finance

Home Depot

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.