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Lowe’s Cos. Inc. (NYSE:LOW)


Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

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)

Lowe’s Cos. Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.02%
01 FCFE0 5,891 
1 FCFE1 7,739  = 5,891 × (1 + 31.38%) 6,729 
2 FCFE2 9,727  = 7,739 × (1 + 25.68%) 7,353 
3 FCFE3 11,671  = 9,727 × (1 + 19.99%) 7,671 
4 FCFE4 13,339  = 11,671 × (1 + 14.29%) 7,622 
5 FCFE5 14,486  = 13,339 × (1 + 8.60%) 7,197 
5 Terminal value (TV5) 245,025  = 14,486 × (1 + 8.60%) ÷ (15.02%8.60%) 121,732 
Intrinsic value of Lowe’s Cos. Inc.’s common stock 158,303 
 
Intrinsic value of Lowe’s Cos. Inc.’s common stock (per share) $209.67
Current share price $131.98

Based on: 10-K (filing date: 2020-03-23).

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 1.32%
Expected rate of return on market portfolio2 E(RM) 11.85%
Systematic risk of Lowe’s Cos. Inc.’s common stock βLOW 1.30
 
Required rate of return on Lowe’s Cos. Inc.’s common stock3 rLOW 15.02%

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 rLOW = RF + βLOW [E(RM) – RF]
= 1.32% + 1.30 [11.85%1.32%]
= 15.02%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Lowe’s Cos. Inc., PRAT model

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Average Jan 31, 2020 Feb 1, 2019 Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015
Selected Financial Data (US$ in millions)
Cash dividends declared 1,653  1,500  1,324  1,169  991  858 
Net earnings 4,281  2,314  3,447  3,093  2,546  2,698 
Net sales 72,148  71,309  68,619  65,017  59,074  56,223 
Total assets 39,471  34,508  35,291  34,408  31,266  31,827 
Shareholders’ equity 1,972  3,644  5,873  6,434  7,654  9,968 
Financial Ratios
Retention rate1 0.61 0.35 0.62 0.62 0.61 0.68
Profit margin2 5.93% 3.25% 5.02% 4.76% 4.31% 4.80%
Asset turnover3 1.83 2.07 1.94 1.89 1.89 1.77
Financial leverage4 20.02 9.47 6.01 5.35 4.08 3.19
Averages
Retention rate 0.63
Profit margin 4.68%
Asset turnover 1.90
Financial leverage 5.62
 
FCFE growth rate (g)5 31.38%

Based on: 10-K (filing date: 2020-03-23), 10-K (filing date: 2019-04-02), 10-K (filing date: 2018-04-02), 10-K (filing date: 2017-04-04), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31).

2020 Calculations

1 Retention rate = (Net earnings – Cash dividends declared) ÷ Net earnings
= (4,2811,653) ÷ 4,281 = 0.61

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 4,281 ÷ 72,148 = 5.93%

3 Asset turnover = Net sales ÷ Total assets
= 72,148 ÷ 39,471 = 1.83

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 39,471 ÷ 1,972 = 20.02

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.63 × 4.68% × 1.90 × 5.62 = 31.38%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (99,645 × 15.02%5,891) ÷ (99,645 + 5,891) = 8.60%

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


FCFE growth rate (g) forecast

Lowe’s Cos. Inc., H-model

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Year Value gt
1 g1 31.38%
2 g2 25.68%
3 g3 19.99%
4 g4 14.29%
5 and thereafter g5 8.60%

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)
= 31.38% + (8.60%31.38%) × (2 – 1) ÷ (5 – 1) = 25.68%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 31.38% + (8.60%31.38%) × (3 – 1) ÷ (5 – 1) = 19.99%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 31.38% + (8.60%31.38%) × (4 – 1) ÷ (5 – 1) = 14.29%