# TJX Cos. Inc. (NYSE:TJX)

## 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)

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

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.08%
01 FCFE0 2,843,424
1 FCFE1 3,936,487 = 2,843,424 × (1 + 38.44%) 3,608,758
2 FCFE2 5,124,907 = 3,936,487 × (1 + 30.19%) 4,307,090
3 FCFE3 6,249,206 = 5,124,907 × (1 + 21.94%) 4,814,729
4 FCFE4 7,104,475 = 6,249,206 × (1 + 13.69%) 5,017,970
5 FCFE5 7,490,542 = 7,104,475 × (1 + 5.43%) 4,850,185
5 Terminal value (TV5) 216,530,032 = 7,490,542 × (1 + 5.43%) ÷ (9.08%5.43%) 140,204,891
Intrinsic value of TJX Cos. Inc.’s common stock 162,803,623

Intrinsic value of TJX Cos. Inc.’s common stock (per share) \$135.60
Current share price \$68.46

Based on: 10-K (filing date: 2020-03-27).

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)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.66% Expected rate of return on market portfolio2 E(RM) 12.16% Systematic risk of TJX Cos. Inc.’s common stock βTJX 0.71 Required rate of return on TJX Cos. Inc.’s common stock3 rTJX 9.08%

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).

3 rTJX = RF + βTJX [E(RM) – RF]
= 1.66% + 0.71 [12.16%1.66%]
= 9.08%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

TJX Cos. Inc., PRAT model

Average Feb 1, 2020 Feb 2, 2019 Feb 3, 2018 Jan 28, 2017 Jan 30, 2016 Jan 31, 2015
Selected Financial Data (US\$ in thousands)
Cash dividends declared on common stock 1,111,788  965,539  793,878  680,183  564,586  483,280
Net income 3,272,193  3,059,798  2,607,948  2,298,234  2,277,658  2,215,128
Net sales 41,716,977  38,972,934  35,864,664  33,183,744  30,944,938  29,078,407
Total assets 24,145,003  14,326,029  14,058,015  12,883,808  11,499,482  11,128,381
Shareholders’ equity 5,948,212  5,048,606  5,148,309  4,510,599  4,307,075  4,264,230
Financial Ratios
Retention rate1 0.66 0.68 0.70 0.70 0.75 0.78
Profit margin2 7.84% 7.85% 7.27% 6.93% 7.36% 7.62%
Asset turnover3 1.73 2.72 2.55 2.58 2.69 2.61
Financial leverage4 4.06 2.84 2.73 2.86 2.67 2.61
Averages
Retention rate 0.71
Profit margin 7.48%
Asset turnover 2.63
Financial leverage 2.74

FCFE growth rate (g)5 38.44%

Based on: 10-K (filing date: 2020-03-27), 10-K (filing date: 2019-04-03), 10-K (filing date: 2018-04-04), 10-K (filing date: 2017-03-28), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31).

2020 Calculations

1 Retention rate = (Net income – Cash dividends declared on common stock) ÷ Net income
= (3,272,1931,111,788) ÷ 3,272,193
= 0.66

2 Profit margin = 100 × Net income ÷ Net sales
= 100 × 3,272,193 ÷ 41,716,977
= 7.84%

3 Asset turnover = Net sales ÷ Total assets
= 41,716,977 ÷ 24,145,003
= 1.73

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 24,145,003 ÷ 5,948,212
= 4.06

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.71 × 7.48% × 2.63 × 2.74
= 38.44%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (82,195,211 × 9.08%2,843,424) ÷ (82,195,211 + 2,843,424)
= 5.43%

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

#### FCFE growth rate (g) forecast

TJX Cos. Inc., H-model

Year Value gt
1 g1 38.44%
2 g2 30.19%
3 g3 21.94%
4 g4 13.69%
5 and thereafter g5 5.43%

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)
= 38.44% + (5.43%38.44%) × (2 – 1) ÷ (5 – 1)
= 30.19%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 38.44% + (5.43%38.44%) × (3 – 1) ÷ (5 – 1)
= 21.94%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 38.44% + (5.43%38.44%) × (4 – 1) ÷ (5 – 1)
= 13.69%