Construction Stocks

Home Depot Inc Valuation – February 2017 $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 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  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 Company sells an assortment of building materials, home improvement products, and lawn and garden products, and provides various services. The Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. Its DIY customers are home owners who purchase products and complete their own projects and installations. The Company assists these customers with specific product and installation questions both in its stores and through online resources and other media designed to provide product and project knowledge. Its DIFM customers are home owners who purchase materials themselves and hire third parties to complete the project or installation. Professional Customers are primarily professional renovators/remodelers, general contractors, repairmen, installers, small business owners and tradesmen.

HD Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HD – February 2017

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 $179,066,664,798 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.34 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 216.67% Pass
6. Moderate PEmg Ratio PEmg < 20 27.44 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 31.69 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 1.34 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 4.54 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

EPSmg $5.28
MG Growth Estimate 15.00%
MG Value $203.38
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $76.60
MG Value based on 0% Growth $44.90
Market Implied Growth Rate 9.47%
Current Price $144.95
% of Intrinsic Value 71.27%

Home Depot Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.36 in 2013 to an estimated $5.28 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 9.47% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Home Depot Inc revealed the company was trading above its Graham Number of $26.06. The company pays a dividend of $2.66 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 27.44, which was below the industry average of 28.49, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-15.89.

Home Depot Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$15.89
Graham Number $26.06
PEmg 27.44
Current Ratio 1.34
PB Ratio 31.69
Current Dividend $2.66
Dividend Yield 1.84%
Number of Consecutive Years of Dividend Growth 7


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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2016
Total Current Assets $19,348,000,000
Total Current Liabilities $14,431,000,000
Long-Term Debt $22,338,000,000
Total Assets $44,502,000,000
Intangible Assets $2,095,000,000
Total Liabilities $38,880,000,000
Shares Outstanding (Diluted Average) 1,229,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.55
Jan2016 $5.46
Jan2015 $4.71
Jan2014 $3.76
Jan2013 $3.00
Jan2012 $2.47
Jan2011 $2.01
Jan2010 $1.57
Jan2009 $1.34
Jan2008 $2.37
Jan2007 $2.79
Jan2006 $2.72
Jan2005 $2.26
Jan2004 $1.88
Jan2003 $1.56
Jan2002 $1.29
Jan2001 $1.10
Jan2000 $1.00
Jan1999 $0.71
Jan1998 $0.52
Jan1997 $0.43

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.28
Jan2016 $4.39
Jan2015 $3.64
Jan2014 $2.92
Jan2013 $2.36
Jan2012 $2.01
Jan2011 $1.86
Jan2010 $1.91
Jan2009 $2.15
Jan2008 $2.50
Jan2007 $2.46
Jan2006 $2.18
Jan2005 $1.81
Jan2004 $1.51
Jan2003 $1.26
Jan2002 $1.05
Jan2001 $0.87

Recommended Reading:

Other ModernGraham posts about the company

Home Depot Inc. Valuation – November 2015 Update $HD
30 Companies in the Spotlight This Week – 11/15/14
Home Depot Inc. Annual Valuation – 2014 $HD
ModernGraham Valuation: Home Depot (HD)

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Disclaimer:

The author held a long position in Home Depot (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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