Stock Analysis on Net

Target Corp. (NYSE:TGT)

Present Value of Free Cash Flow to Equity (FCFE)

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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)

Target Corp., 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 14.57%
01 FCFE0 3,692
1 FCFE1 4,298 = 3,692 × (1 + 16.43%) 3,752
2 FCFE2 4,931 = 4,298 × (1 + 14.73%) 3,757
3 FCFE3 5,574 = 4,931 × (1 + 13.03%) 3,706
4 FCFE4 6,205 = 5,574 × (1 + 11.32%) 3,601
5 FCFE5 6,802 = 6,205 × (1 + 9.62%) 3,446
5 Terminal value (TV5) 150,741 = 6,802 × (1 + 9.62%) ÷ (14.57%9.62%) 76,358
Intrinsic value of Target Corp. common stock 94,620
 
Intrinsic value of Target Corp. common stock (per share) $204.94
Current share price $177.21

Based on: 10-K (reporting date: 2024-02-03).

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 4.42%
Expected rate of return on market portfolio2 E(RM) 13.61%
Systematic risk of Target Corp. common stock βTGT 1.11
 
Required rate of return on Target Corp. common stock3 rTGT 14.57%

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 rTGT = RF + βTGT [E(RM) – RF]
= 4.42% + 1.11 [13.61%4.42%]
= 14.57%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Target Corp., PRAT model

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Average Feb 3, 2024 Jan 28, 2023 Jan 29, 2022 Jan 30, 2021 Feb 1, 2020 Feb 2, 2019
Selected Financial Data (US$ in millions)
Dividends declared 2,050 1,931 1,655 1,367 1,345 1,347
Net earnings 4,138 2,780 6,946 4,368 3,281 2,937
Sales 105,803 107,588 104,611 92,400 77,130 74,433
Total assets 55,356 53,335 53,811 51,248 42,779 41,290
Shareholders’ investment 13,432 11,232 12,827 14,440 11,833 11,297
Financial Ratios
Retention rate1 0.50 0.31 0.76 0.69 0.59 0.54
Profit margin2 3.91% 2.58% 6.64% 4.73% 4.25% 3.95%
Asset turnover3 1.91 2.02 1.94 1.80 1.80 1.80
Financial leverage4 4.12 4.75 4.20 3.55 3.62 3.65
Averages
Retention rate 0.57
Profit margin 3.88%
Asset turnover 1.88
Financial leverage 3.98
 
FCFE growth rate (g)5 16.43%

Based on: 10-K (reporting date: 2024-02-03), 10-K (reporting date: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02).

2024 Calculations

1 Retention rate = (Net earnings – Dividends declared) ÷ Net earnings
= (4,1382,050) ÷ 4,138
= 0.50

2 Profit margin = 100 × Net earnings ÷ Sales
= 100 × 4,138 ÷ 105,803
= 3.91%

3 Asset turnover = Sales ÷ Total assets
= 105,803 ÷ 55,356
= 1.91

4 Financial leverage = Total assets ÷ Shareholders’ investment
= 55,356 ÷ 13,432
= 4.12

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.57 × 3.88% × 1.88 × 3.98
= 16.43%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (81,816 × 14.57%3,692) ÷ (81,816 + 3,692)
= 9.62%

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


FCFE growth rate (g) forecast

Target Corp., H-model

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Year Value gt
1 g1 16.43%
2 g2 14.73%
3 g3 13.03%
4 g4 11.32%
5 and thereafter g5 9.62%

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)
= 16.43% + (9.62%16.43%) × (2 – 1) ÷ (5 – 1)
= 14.73%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 16.43% + (9.62%16.43%) × (3 – 1) ÷ (5 – 1)
= 13.03%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 16.43% + (9.62%16.43%) × (4 – 1) ÷ (5 – 1)
= 11.32%