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Here is a look at how Home Depot, Inc. (NYSE:HD) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value$68.76
MG OpinionOvervalued
Value Based on 3% Growth$41.55
Value Based on 0% Growth$24.36
Market Implied Growth Rate9.09%
Current Ratio1.30
PB Ratio7.09

Key Data:

Balance Sheet - 8/4/2013 (an Introduction to the Balance Sheet)

Current Assets$16,895,000,000
Current Liabilities$12,995,000,000
Total Debt$11,450,000,000
Total Assets$42,192,000,000
Intangible Assets$1,170,000,000
Total Liabilities$26,714,000,000
Outstanding Shares1,435,000,000

Earnings Per Share - Diluted

2013 (estimate)$3.6

Earnings Per Share - Modern Graham

2013 (estimate)$2.87


Home Depot appears to be significantly overvalued at this time. The company's earnings on the surface seem to be improving the last few years, but when you look at the normalized earnings (EPSmg), there has been only a slight improvement over the longer historical period. As a result, the growth rate the company has exhibited historically is much less than the 9% the market is implying. In addition, the PEmg ratio is very high, along with the PB ratio, both of which also indicate the current price may be higher than the intrinsic value. Finally, the company currently does not have a strong financial condition, having both a low current ratio and a low debt to net current assets ratio. As a result, the company fails to fulfill the requirements of either the Defensive or Enterprising Investor. Any investor considering making a purchase of Home Depot should do considerable further research.

Disclaimer: The author held a position in Home Depot at the time of publication.

Source: ModernGraham Valuation Of Home Depot