Sliding Home Depot as Bellwether for Domestic Economy

Home Depot (HD) the home improvement retailer is a useful bellwether for the domestic U.S. economy.  $HD is trading near the bottom of the stock’s 52-week range.  So how does the current share price look from an intrinsic value perspective?

Valuecruncher valuation model of $HD with interactive assumptions

Valuecruncher produces a valuation of US$24.00 for $HD. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 14.7% above the current share price of US$20.93.

Assumptions

• Revenue: Reuters aggregates 17 analysts covering $HD and these analysts have mean estimates of 2009 and 2010 revenues of US$72.4 billion and US$73.0 billion respectively. For our analysis we have used US$72.5 billion in 2009, US$73.0 billion in 2010 and US$75.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 9.5% in 2009 rising to 10.5% in 2011. Reuters has $HD‘s EBITD margin at 10.1% last year and averaging 12.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.25 billion in 2009 and 2010 then US$2.50 billion per annum moving forward.
• Discount Rate: 9.0%.
• Terminal Growth Rate: 2.5%.

Our analysis incorporates the cash and debt on the $HD balance sheet - Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Comments

[prudentinve...:]

It takes courage, or foolishness, to confidently project HD revenues for 2009, 2010 and beyond. Since any valuation model is sensitive to assumptions of future revenue and profit, I'd be sceptical at this point of the accuracy of this result.

2008 Nov 10 04:36 PM