Stock Analysis on Net
Stock Analysis on Net

Target Corp. (NYSE:TGT)

Present Value of Free Cash Flow to the Firm (FCFF)

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Target Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.56%
01 FCFF0 4,208
1 FCFF1 4,533 = 4,208 × (1 + 7.73%) 4,027
2 FCFF2 4,883 = 4,533 × (1 + 7.72%) 3,854
3 FCFF3 5,259 = 4,883 × (1 + 7.70%) 3,688
4 FCFF4 5,663 = 5,259 × (1 + 7.68%) 3,528
5 FCFF5 6,097 = 5,663 × (1 + 7.67%) 3,375
5 Terminal value (TV5) 134,235 = 6,097 × (1 + 7.67%) ÷ (12.56% – 7.67%) 74,298
Intrinsic value of Target Corp. capital 92,769
Less: Debt (fair value) 15,480
Intrinsic value of Target Corp. common stock 77,289
 
Intrinsic value of Target Corp. common stock (per share) $167.41
Current share price $167.11

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

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.

Weighted Average Cost of Capital (WACC)

Target Corp., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 77,153 0.83 14.47%
Debt (fair value) 15,480 0.17 3.02% = 3.85% × (1 – 21.68%)

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

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 461,690,206 × $167.11
= $77,153,050,324.66

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (21.90% + 18.70% + 22.00% + 21.20% + 22.00% + 21.30%) ÷ 6
= 21.68%

WACC = 12.56%

FCFF Growth Rate (g)

FCFF 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)
Net interest expense 502 478 421 977 477 461
Discontinued operations, net of tax — — — — 12 7
Net earnings 4,138 2,780 6,946 4,368 3,281 2,937
 
Effective income tax rate (EITR)1 21.90% 18.70% 22.00% 21.20% 22.00% 21.30%
 
Net interest expense, after tax2 392 389 328 770 372 363
Add: Dividends declared 2,050 1,931 1,655 1,367 1,345 1,347
Interest expense (after tax) and dividends 2,442 2,320 1,983 2,137 1,717 1,710
 
EBIT(1 – EITR)3 4,530 3,169 7,274 5,138 3,641 3,293
 
Current portion of long-term debt and other borrowings 1,116 130 171 1,144 161 1,052
Long-term debt and other borrowings, excluding current portion 14,922 16,009 13,549 11,536 11,338 10,223
Shareholders’ investment 13,432 11,232 12,827 14,440 11,833 11,297
Total capital 29,470 27,371 26,547 27,120 23,332 22,572
Financial Ratios
Retention rate (RR)4 0.46 0.27 0.73 0.58 0.53 0.48
Return on invested capital (ROIC)5 15.37% 11.58% 27.40% 18.94% 15.61% 14.59%
Averages
RR 0.51
ROIC 15.22%
 
FCFF growth rate (g)6 7.73%

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).

1 See details »

2024 Calculations

2 Net interest expense, after tax = Net interest expense × (1 – EITR)
= 502 × (1 – 21.90%)
= 392

3 EBIT(1 – EITR) = Net earnings – Discontinued operations, net of tax + Net interest expense, after tax
= 4,138 – 0 + 392
= 4,530

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [4,530 – 2,442] ÷ 4,530
= 0.46

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 4,530 ÷ 29,470
= 15.37%

6 g = RR × ROIC
= 0.51 × 15.22%
= 7.73%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (92,633 × 12.56% – 4,208) ÷ (92,633 + 4,208)
= 7.67%

where:

Total capital, fair value0 = current fair value of Target Corp. debt and equity (US$ in millions)
FCFF0 = the last year Target Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Target Corp. capital

FCFF growth rate (g) forecast

Target Corp., H-model

Microsoft Excel
Year Value gt
1 g1 7.73%
2 g2 7.72%
3 g3 7.70%
4 g4 7.68%
5 and thereafter g5 7.67%

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)
= 7.73% + (7.67% – 7.73%) × (2 – 1) ÷ (5 – 1)
= 7.72%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 7.73% + (7.67% – 7.73%) × (3 – 1) ÷ (5 – 1)
= 7.70%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 7.73% + (7.67% – 7.73%) × (4 – 1) ÷ (5 – 1)
= 7.68%