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A mecca for the do-it-yourselfer, Home Depot is the world’s largest home-improvement retailer.
HD is a solid firm with enduring competitive advantages. In Buffett parlance, it has a wide economic moat.I rate the firm's fundamentals (financial heath + predictabilty of its business) at 90/100 (A-).The firm's managers are excellent stewards of investor-owner capital.All of this is reflected in the stock price.HD stock is trading well above my fair value estimate of $50.25.Price to FV ratio is 1.23: a negative 23% margin of safety.Over the next 5 years, I forecast that the stock's ROI will underperform the expected market ROI of 7.7%. My forecast ROI for HD stock is 2.8% a year. ROI is comprised of 1.9% current dividend yield, 4.9% profit growth and 4.0% multiple contraction.In my view, HD stock is a sell at current levels.Short-term momentum and market psychology may drive the stock price slightly higher in the very short-term. In the long run, however, the voting machine will become a weighing machine and, in my opionion, the stock price will revert to its fair value.
How do you arrive at your fair value? By my back of the envelope, $50.25 is 13.65 times forward earnings for a best of breed in a sector (housing retail) very likely to have above-market growth. And a history of excellent capital allocation, as I understand it. Isn't something like 16 or 17 times forward earnings more appropriate? 16 times gets you a fair value of $58.91, which sounds more like it to me. I do agree its gotten ahead of itself. I sold my modest amount of shares and my 2014 Leaps (both at huge % profits) weeks ago. But your $50.25 sounds low to me.
Congratulations on the profit! I think the difference in our numbers relates primarily to the initial eps. Like you, I use a pe of 16 which translates to a forecast growth rate of 5% in my dcf model. I have revised my eps to $3.26 a share, which is my new forecast eps looking 2Qs forward and 2Qs back. This results in an intrinsic value of $54.50. Your calculations imply an initial eps of $3.68. If I use $3.68, my dcf model predicts an intrinsic value of $61.50. Given that the eps for the ttm is $2.81, a forward eps of $3.68 is a little too aggressive for me. My current forecast of HD's 5-year ROI is slightly above 7%. I think the market will yield closer to 8%. I agree with you on the capital allocation point: HD is a well-oiled cash machine.
HD's stock price is in la-la land. Sell.
Update - Price/FV 1.08 Fair value 75.20 Normalized eps 3.50 Sales growth 10.9%Op Margin compresses to 11% from 11.5%Competitive advantage period 10 years (wide moat)Discount rate 10%
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