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Adobe Inc. (ADBE)


Present Value of Free Cash Flow to Equity (FCFE)

Difficulty: Intermediate

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’s asset base.


Intrinsic Stock Value (Valuation Summary)

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

USD $ in thousands, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 12.43%
01 FCFE0 6,009,360 
1 FCFE1 6,722,290  = 6,009,360 × (1 + 11.86%) 5,979,180 
2 FCFE2 7,456,022  = 6,722,290 × (1 + 10.91%) 5,898,697 
3 FCFE3 8,199,105  = 7,456,022 × (1 + 9.97%) 5,769,521 
4 FCFE4 8,938,457  = 8,199,105 × (1 + 9.02%) 5,594,488 
5 FCFE5 9,659,679  = 8,938,457 × (1 + 8.07%) 5,377,555 
5 Terminal value (TV5) 239,454,687  = 9,659,679 × (1 + 8.07%) ÷ (12.43%8.07%) 133,304,725 
Intrinsic value of Adobe Inc.’s common stock 161,924,166 
Intrinsic value of Adobe Inc.’s common stock (per share) $333.56
Current share price $306.87

Based on: 10-K (filing date: 2019-01-25).

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 2.45%
Expected rate of return on market portfolio2 E(RM) 11.79%
Systematic risk (β) of Adobe Inc.’s common stock βADBE 1.07
Required rate of return on Adobe Inc.’s common stock3 rADBE 12.43%

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).

Calculations

2 See Details »

3 rADBE = RF + βADBE [E(RM) – RF]
= 2.45% + 1.07 [11.79%2.45%]
= 12.43%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Adobe Inc., PRAT model

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Average Nov 30, 2018 Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013
Selected Financial Data (USD $ in thousands)
Net income 2,590,774  1,693,954  1,168,782  629,551  268,395  289,985 
Revenue 9,030,008  7,301,505  5,854,430  4,795,511  4,147,065  4,055,240 
Total assets 18,768,682  14,535,556  12,707,114  11,726,472  10,785,829  10,380,298 
Stockholders’ equity 9,362,114  8,459,869  7,424,835  7,001,580  6,775,905  6,724,634 
Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00 1.00
Profit margin2 28.69% 23.20% 19.96% 13.13% 6.47% 7.15%
Asset turnover3 0.48 0.50 0.46 0.41 0.38 0.39
Financial leverage4 2.00 1.72 1.71 1.67 1.59 1.54
Averages
Retention rate 1.00
Profit margin 16.43%
Asset turnover 0.44
Financial leverage 1.65
Growth rate of FCFE (g)5 11.86%

Based on: 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20), 10-K (filing date: 2014-01-21).

2018 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 2,590,774 ÷ 9,030,008 = 28.69%

3 Asset turnover = Revenue ÷ Total assets
= 9,030,008 ÷ 18,768,682 = 0.48

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 18,768,682 ÷ 9,362,114 = 2.00

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 16.43% × 0.44 × 1.65 = 11.86%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (148,966,593 × 12.43%6,009,360) ÷ (148,966,593 + 6,009,360) = 8.07%

where:
Equity market value0 = current market value of Adobe Inc.’s common stock (USD $ in thousands)
FCFE0 = last year Adobe Inc.’s free cash flow to equity (USD $ in thousands)
r = required rate of return on Adobe Inc.’s common stock


FCFE growth rate (g) forecast

Adobe Inc., H-model

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Year Value gt
1 g1 11.86%
2 g2 10.91%
3 g3 9.97%
4 g4 9.02%
5 and thereafter g5 8.07%

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 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 11.86% + (8.07%11.86%) × (2 – 1) ÷ (5 – 1) = 10.91%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.86% + (8.07%11.86%) × (3 – 1) ÷ (5 – 1) = 9.97%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.86% + (8.07%11.86%) × (4 – 1) ÷ (5 – 1) = 9.02%