Home Depot Inc. Valuation – November 2015 Update $HD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Home Depot Inc. (HD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sell an assortment of building materials, home improvement products and lawn and garden products and provide services. The Home Depot stores average approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. The Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. As of December 31, 2014, the Company had 2,269 The Home Depot stores, which included 1,977 stores in the United States, including the Commonwealth of Puerto Rico and the territories of the United States Virgin Islands and Guam; 181 stores in Canada, and 111 stores in Mexico.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of HD – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $159,485,695,961 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.19 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 111.23% Pass
6. Moderate PEmg Ratio PEmg < 20 28.71 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 18.54 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.19 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 5.21 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HD value Chart November 2015

EPSmg $4.33
MG Growth Estimate 15.00%
MG Value $166.55
Opinion Undervalued
MG Value based on 3% Growth $62.73
MG Value based on 0% Growth $36.77
Market Implied Growth Rate 10.11%
Current Price $124.21
% of Intrinsic Value 74.58%

Home Depot Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.01 in 2012 to an estimated $4.33 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 10.11% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Home Depot Inc. (HD)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

HD Charts November 2015

Net Current Asset Value (NCAV) -$12.13
Graham Number $28.22
PEmg 28.71
Current Ratio 1.19
PB Ratio 18.54
Dividend Yield 1.71%
Number of Consecutive Years of Dividend Growth 6



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Most Recent Balance Sheet Figures

Total Current Assets $19,531,000,000
Total Current Liabilities $16,399,000,000
Long-Term Debt $16,318,000,000
Total Assets $43,798,000,000
Intangible Assets $1,340,000,000
Total Liabilities $35,161,000,000
Shares Outstanding (Diluted Average) 1,289,000,000

Earnings Per Share History

Next Fiscal Year Estimate $5.26
Jan15 $4.71
Jan14 $3.76
Jan13 $3.00
Jan12 $2.47
Jan11 $2.01
Jan10 $1.57
Jan09 $1.34
Jan08 $2.37
Jan07 $2.79
Jan06 $2.72
Jan05 $2.26
Jan04 $1.88
Jan03 $1.56
Jan02 $1.29
Jan01 $1.10
Jan00 $1.00
Jan99 $0.71
Jan98 $0.52
Jan97 $0.43
Jan96 $0.34

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.33
Jan15 $3.64
Jan14 $2.92
Jan13 $2.36
Jan12 $2.01
Jan11 $1.86
Jan10 $1.91
Jan09 $2.15
Jan08 $2.50
Jan07 $2.46
Jan06 $2.18
Jan05 $1.81
Jan04 $1.51
Jan03 $1.26
Jan02 $1.05
Jan01 $0.87
Jan00 $0.71

Recommended Reading:

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The author held a long position in Home Depot Inc. (HD) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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