The Home Depot, Inc. (HD)

Equity
US
Basic Materials

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Sufficiently resilient to price shocks

Key return factors

Solid dividends

Somewhat favourable analyst view

Good margins and returns

Corporate actions & dividendsDividend of USD 2.250 with an ex-date of 29 May 2024.

Company profileThe Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products The company also offers installation services for flooring, cabinets and cabinet makeovers, countertops, furnaces and central air systems, and windows. In addition, it provides tool and equipment rental services. The company primarily serves homeowners; and professional renovators/remodelers, general contractors, maintenance professionals, handymen, property managers, building service contractors, and specialty tradesmen, such as electricians, plumbers, and painters. It also sells its products through websites, including homedepot.com; blinds.com, an online site for custom window coverings; and thecompanystore.com, an online site for textiles and décor products. As of December 31, 2021, the company operated 2,317 stores in the United States. The Home Depot, Inc. was incorporated in 1978 and is based in Atlanta, Georgia.

Valuation: Slightly overvalued

Multiple

TTM

NTM

P/E

21.60

21.70

PEG

2.40

P/B

176.70

19.30

P/S

2.10

P/FCF

18.00

21.90

EV/EBITDA

15.10

15.20

From both historical and forecast perspectives, the stock is slightly overpriced compared to similar stocks. In particular, the stock is reasonably priced on P/E, 'expensive' on EV/EBITDA, and trading at neutral levels on P/FCF.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. When measured against its worldwide peers from the same industry (as shown above), the stock has been weaker, underperforming by 0ppts. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 372 and suggests 15% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 440.0. This translates into 35% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 307.0. This is equivalent to 6% downside potential in the worst case.

Profitability: Good

RoE

The Home Depot, Inc. reported a return on equity (RoE) of 908.7% in the last 12 months, down from 1014.7% in FY23. The market consensus projects an RoE of 285.4% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 16.7% in the last 12 months, a decrease from 17.3% in FY23. The market analysts predict that RoA will be 0.2% in FY24, though below its peers in this period.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 23.8%, above the peers. The consensus estimate for FY24 for RoCE is 0.3%, however, this time below its peers.

Net margin

EBITDA margin

Historically, HD has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 9.1%, down from 9.1% in FY23. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 15.3% in the last 12 months, a decline from 15.4% in FY23.

RoIC / WACC = 4.8(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 4.8 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Poor

Revenue

EBITDA

EPS

Free cash flow

HD reported revenue of USD 151 830mn in the last 12 months, down 1% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 1% from FY23 to USD 14.96. Market expects EPS to reach USD 14.96352 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). Poor revenue growth and insufficient cost control translated into very slow bottom-line growth in recent years (negative-to-neutral). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of FCF. On the positive side, revenue dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note solid return on capital, adequate interest coverage, and solid cash flow generation, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, poor working capital management, and an unfavourable capital structure.

Volatility: Negligible

In normal market circumstances, HD is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to minimal.

Stress-test: Modest

In highly turbulent market conditions, HD is as volatile as an index. In other words, the stock will move with the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be limited.

Selling difficulty: Very low

HD boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.