Stock Analysis on Net
Stock Analysis on Net

Broadcom Inc. (NASDAQ:AVGO)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

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 asset base.

Intrinsic Stock Value (Valuation Summary)

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

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.10%
01 FCFE0 17,230
1 FCFE1 17,397 = 17,230 × (1 + 0.97%) 15,247
2 FCFE2 17,998 = 17,397 × (1 + 3.46%) 13,825
3 FCFE3 19,068 = 17,998 × (1 + 5.94%) 12,837
4 FCFE4 20,675 = 19,068 × (1 + 8.43%) 12,199
5 FCFE5 22,931 = 20,675 × (1 + 10.91%) 11,858
5 Terminal value (TV5) 798,350 = 22,931 × (1 + 10.91%) ÷ (14.10% – 10.91%) 412,839
Intrinsic value of Broadcom Inc. common stock 478,806
 
Intrinsic value of Broadcom Inc. common stock (per share) $1,033.20
Current share price $1,294.42

Based on: 10-K (reporting date: 2023-10-29).

1 See details »

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)

Microsoft Excel
Assumptions
Rate of return on LT Treasury Composite1 RF 4.90%
Expected rate of return on market portfolio2 E(RM) 13.54%
Systematic risk of Broadcom Inc. common stock βAVGO 1.06
 
Required rate of return on Broadcom Inc. common stock3 rAVGO 14.10%

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).

2 See details »

3 rAVGO = RF + βAVGO [E(RM) – RF]
= 4.90% + 1.06 [13.54% – 4.90%]
= 14.10%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Broadcom Inc., PRAT model

Microsoft Excel
Average Oct 29, 2023 Oct 30, 2022 Oct 31, 2021 Nov 1, 2020 Nov 3, 2019 Nov 4, 2018
Selected Financial Data (US$ in millions)
Dividends to common stockholders 7,645 6,733 5,913 5,235 4,235 2,921
Dividends to preferred stockholders — 272 299 297 29 —
Net income attributable to Broadcom Inc. stockholders 14,082 11,495 6,736 2,960 2,724 12,259
Net revenue 35,819 33,203 27,450 23,888 22,597 20,848
Total assets 72,861 73,249 75,570 75,933 67,493 50,124
Stockholders’ equity 23,988 22,709 24,962 23,874 24,941 26,657
Financial Ratios
Retention rate1 0.46 0.40 0.08 -0.97 -0.57 0.76
Profit margin2 39.31% 33.80% 23.45% 11.15% 11.93% 58.80%
Asset turnover3 0.49 0.45 0.36 0.31 0.33 0.42
Financial leverage4 3.04 3.23 3.03 3.18 2.71 1.88
Averages
Retention rate 0.03
Profit margin 29.74%
Asset turnover 0.40
Financial leverage 3.04
 
FCFE growth rate (g)5 0.97%

Based on: 10-K (reporting date: 2023-10-29), 10-K (reporting date: 2022-10-30), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-11-01), 10-K (reporting date: 2019-11-03), 10-K (reporting date: 2018-11-04).

2023 Calculations

1 Retention rate = (Net income attributable to Broadcom Inc. stockholders – Dividends to common stockholders – Dividends to preferred stockholders) ÷ (Net income attributable to Broadcom Inc. stockholders – Dividends to preferred stockholders)
= (14,082 – 7,645 – 0) ÷ (14,082 – 0)
= 0.46

2 Profit margin = 100 × (Net income attributable to Broadcom Inc. stockholders – Dividends to preferred stockholders) ÷ Net revenue
= 100 × (14,082 – 0) ÷ 35,819
= 39.31%

3 Asset turnover = Net revenue ÷ Total assets
= 35,819 ÷ 72,861
= 0.49

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 72,861 ÷ 23,988
= 3.04

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.03 × 29.74% × 0.40 × 3.04
= 0.97%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (599,862 × 14.10% – 17,230) ÷ (599,862 + 17,230)
= 10.91%

where:
Equity market value0 = current market value of Broadcom Inc. common stock (US$ in millions)
FCFE0 = the last year Broadcom Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Broadcom Inc. common stock

FCFE growth rate (g) forecast

Broadcom Inc., H-model

Microsoft Excel
Year Value gt
1 g1 0.97%
2 g2 3.46%
3 g3 5.94%
4 g4 8.43%
5 and thereafter g5 10.91%

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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 0.97% + (10.91% – 0.97%) × (2 – 1) ÷ (5 – 1)
= 3.46%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 0.97% + (10.91% – 0.97%) × (3 – 1) ÷ (5 – 1)
= 5.94%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 0.97% + (10.91% – 0.97%) × (4 – 1) ÷ (5 – 1)
= 8.43%