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 |
