As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, The Home Depot, Inc. (HD).
 

Profile

The Home Depot, Inc. operates as a home improvement retailer in the United States and internationally. It sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products. The company also offers installation services for flooring, water heaters, bath, garage doors, cabinets, cabinet makeovers, countertops, sheds, furnaces and central air systems, and windows. In addition, it provides tool and equipment rental services.
 

Recent Performance

Over the past twelve months the share price is up 15.08%.

Source: Google Finance

Inputs

• Discount Rate: 8%
• Terminal Growth Rate: 3%
• WACC: 8%

Forecasted Free Cash Flows (FCFs)

Terminal Value

Terminal Value = FCF * (1 + g) / (r – g) = 487.60 billion

Present Value of Terminal Value

PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 331.85 billion

Present Value of Free Cash Flows

Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 79.10 billion

Enterprise Value

Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 410.95 billion

Net Debt

Net Debt = Total Debt – Total Cash = 48.48 billion

Equity Value

Equity Value = Enterprise Value – Net Debt = 362.47 billion

Per-Share DCF Value

Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $365.39
 

Conclusion

Based on the DCF valuation, the stock is overvalued. The DCF value of $365.39 per share is lower than the current market price of $409.33. The Margin of Safety is -12.02%.

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