Home Depot: Gauge Analysis (updated November 24, 2020)

I have analyzed Home Depot's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners.  Recognizing the value of its employees during the COVID-19 pandemic, Home Depot hiked their pay and benefits.  In November 2020, Home Depot announced a deal to acquire HD Supply Holdings, a former subsidiary, for $8 billion.  HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.

Home Depot recorded profits of $12 billion on revenue of $126 billion during the last year. In the quarter that ended on 1 November 2020, Home Depot earned $3.18 per share, which missed the $3.68 Wall Street consensus forecast. See https://tinyurl.com/yxqu3gxd for Home Depot's most recent quarterly report.

Shares of Home Depot now trade for about $271 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

Home Depot's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $292.6 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 360% (<150% is conservative)

3. The Company Generates Stable Earnings: GREEN

    Twenty positive quarterly earnings reports in last 5 years (perfect)

    Earnings variability = N/A (negligible)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 16% (good)

    Owner Earnings growth rate (five-year average) = 12% (good)

    Free Cash Flow growth rate (trailing year) = 62% (terrific)

    Free Cash Flow growth rate (five-year average) = 18% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 63% (excellent)

    Operating Profit/Sales = 14.0% (good)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 22% (very good)

    Dividend = 36% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 22.8 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 30.7 (expensive)

    Free Cash Flow/Market Value = 6.2% (appealing, more than the five-year average of 5.0%)

    Acquirer's Multiple = 17.8 (expensive)

    Price/Book Value = 100.0 (more expensive than the five-year average of 62.9)

    Price/Sales = 2.3 (more expensive than the five-year average of 2.0)

In summary, the analysis assigned Home Depot five GREEN, zero YELLOW, and two RED grades.  The resulting Overall Score is 54 of the 100 possible points, which is not high enough.  The score is below the 60-point threshold, and, therefore, Home Depot does not qualify at this time for more in-in-depth consideration.

The share price would theoretically have to fall by 13.1%, from $271.41 to $235.87, all else being equal, to lift the Overall score to the 60-point threshold.  Of course, sustained improvements to the company's financial performance is the best way to raise the Overall Score. Check this blog occasionally for updates on how Home Depot's score actually changes in response to new data.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to perform verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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