Company Profile (obtained from Marketwatch): Home Depot, Inc. is a home improvement retailer that sells building materials and home improvement products. It operates The Home Depot stores, which provides full-service, warehouse-style stores that sells a wide assortment of building materials, home improvement products and lawn and garden products and provide a number of services. The company offers national installation services through pre-screened independent contractors for products ranging from floors to roofs, windows to water heaters, and kitchen cabinets to vinyl siding. Its retail stores offer professional customers, including repair and remodel contractors, special services and support to make them more successful on the job site. The company serves professional remodelers, general contractors, repairmen, small business owners, and tradesmen. Home Depot was founded by Bernard Marcus, Arthur M. Blank, Kenneth Gerald Langone and Pat Farrah on June 29, 1978 and is headquartered at Atlanta, GA.
Downloadable PDF version of this valuation:
ModernGraham Valuation of HD – February 2018
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 | $219,945,507,169 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.17 | 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 | 268.93% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 26.39 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 151.17 | 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 | 1.17 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 8.86 | 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 | $7.14 |
| MG Growth Estimate | 14.44% |
| MG Value | $266.73 |
| Opinion | Undervalued |
| MG Grade | D+ |
| MG Value based on 3% Growth | $103.47 |
| MG Value based on 0% Growth | $60.66 |
| Market Implied Growth Rate | 8.95% |
| Current Price | $188.35 |
| % of Intrinsic Value | 70.61% |
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 $3.64 in 2015 to an estimated $7.14 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.95% 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 $15.4. The company pays a dividend of $3.56 per share, for a yield of 1.9% Its PEmg (price over earnings per share – ModernGraham) was 26.39, which was above the industry average of 25.98. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-20.69.
Home Depot Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$20.69 |
| Graham Number | $15.40 |
| PEmg | 26.39 |
| Current Ratio | 1.17 |
| PB Ratio | 151.17 |
| Current Dividend | $3.56 |
| Dividend Yield | 1.89% |
| Number of Consecutive Years of Dividend Growth | 8 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 1/1/2018 |
| Total Current Assets | $18,933,000,000 |
| Total Current Liabilities | $16,194,000,000 |
| Long-Term Debt | $24,267,000,000 |
| Total Assets | $44,529,000,000 |
| Intangible Assets | $2,275,000,000 |
| Total Liabilities | $43,075,000,000 |
| Shares Outstanding (Diluted Average) | 1,167,000,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $8.58 |
| Jan2018 | $7.29 |
| Jan2017 | $6.45 |
| 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 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $7.14 |
| Jan2018 | $6.12 |
| Jan2017 | $5.25 |
| 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 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author held a long position in 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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