Home Depot (HD)’s Falls -4.0%. Is It Fairly Valued?

Shares of Home Depot (HD) slid -4.0 % during today's aftermarket session, which brings their 52 week performance to -7.4%. The Market Inference outlook on this stock is that it is fairly valued at today's price of $310.88. But we also believe that a value analysis should be complemented by an overview of the company's strong growth indicators and mixed market sentiment.

The Home Depot, Inc. operates as a home improvement retailer. The large-cap Consumer Cyclical company has 500,000 full time employees and is based in Atlanta, United States.

HD's P/E Ratio Is Comparable to its Sector Average

Compared to the Consumer Cyclical sector's average of 24.11, Home Depot has a trailing twelve month price to earnings (P/E) ratio of 18.7 and an expected P/E ratio of 18.4. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($16.59) or forward earnings per share ($16.89).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Home Depot's P/E ratio is near its sector average of 24.11, we can deduce that the market is fairly valuing the company's earnings.

Home Depot Is Overvalued in Terms of Expected Growth

Home Depot's PEG ratio is 3.93. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Home Depot's case, it tells us the company is overvalued.

HD Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Home Depot's P/B ratio of 244.2 is higher than its sector average of 3.11, such a margin of safety does not exist for the stock.

HD Is Generating Cash

Home Depot has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 10.2%, compared to 1.9% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 12.7% and a coefficient of variability of 20.8%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-01-31 16,571 -2,566 14,005 -14.48
2021-01-31 18,839 -2,463 16,376 48.27
2020-01-31 13,723 -2,678 11,045 4.24
2019-01-31 13,038 -2,442 10,596 n/a

Home Depot's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Home Depot's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Home Depot's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-01-31 151,157 100,325 33.63 -0.94
2021-01-31 132,110 87,257 33.95 -0.41
2020-01-31 110,225 72,653 34.09 -0.73
2019-01-31 108,203 71,043 34.34 n/a

Home Depot's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-01-31 151,157 27,792 15.24 10.12
2021-01-31 132,110 26,575 13.84 -3.69
2020-01-31 110,225 21,729 14.37 -1.44
2019-01-31 108,203 21,383 14.58 n/a

Home Depot's cost of revenue is growing at a rate of 12.5% in contrast to 9.5% for operating expenses. Sales revenues, on the other hand, have experienced a 12.0% growth rate. As a result, the average gross margins growth is -0.7 and the average operating margins growth rate is 1.7, with coefficients of variability of 0.9% and 4.0% respectively.

We See Mixed Market Signals Regarding HD

Home Depot has an average rating of buy and target prices ranging from $470 to $258. At its current price of $310.88, the company is trading -9.11% away from its target price of $342.03. 1.3% of the company's shares are linked to short positions, and 71.4% of the shares are owned by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 94,440,614 2022-09-29 9% $29,359,698,541
Blackrock Inc. 71,476,400 2022-09-29 7% $22,220,583,581
State Street Corporation 43,684,526 2022-09-29 4% $13,580,645,656
Capital World Investors 40,060,264 2022-09-29 4% $12,453,935,067
Geode Capital Management, LLC 18,422,793 2022-09-29 2% $5,727,277,977
Morgan Stanley 17,039,088 2022-09-29 2% $5,297,111,760
Bank of America Corporation 14,963,938 2022-09-29 1% $4,651,989,118
Wellington Management Group, LLP 14,763,112 2022-09-29 1% $4,589,556,330
Northern Trust Corporation 12,879,806 2022-09-29 1% $4,004,074,152
FMR, LLC 12,232,187 2022-09-29 1% $3,802,742,354
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.