Home Depot is Cheap, Regardless of Upcoming Guidance

When Home Depot (HD) announced their $22.5B buyback, I wrote a quick assessment of what it could mean to HD’s stock and valuation.

With HD about to announce their new EPS guidance on July 10th, I figure now is a good time to closely go through the numbers with a generous (albeit conservative) reduction of estimated earnings.

click to enlarge

I attempted to do two types of analysis. One assuming HD will purchase the shares within a three year process, and the other assuming the buyback will take place with in a two year process. (The two year buyback is ambitious as it will call for over $11B a year, which assumes some $40M/day of buybacks, which takes away some one million shares a day from every open trading day.) Also, after reviewing the supply biz and its affect on EPS over the last 4 quarters, I assumed a 10% reduction with out the supply biz. (The range varied from 8-10%)

From the numbers attached, even if the guidance is drastically reduced, HD still looks pretty cheap with a pretty low forward PE at current prices. Assuming HD consistently trades at a PE of 15, the stock will be in the mid 40s. And if the retail conditions improve, the stock could certainly see 50.

HD 1-yr chart

Comments

[ggregg8:]

The stock market isn't a clear representation of how well the economy is doing right now. The negative signs are omnipresent. As we know, China sold back $5.8 billion in T bonds recently. What does that say for the US economy during a bull market? US auto sales are down. Durable goods are slumping. Not to mention Bear Stearns' financial troubles.

Consumer confidence continues to drop in accordance to the housing slump. I believe HD will continue to drop for a while longer, surpassing the 52 week low of $32.85. Until the median housing price gets nearer to the median gross income (based on the assumption that people will spend 2-3x their gross income on housing), HD will continue to drop.

I certainly agree that once the housing market rebounds, then HD will be looking pretty if you bought it early enough, but until that day it doesn't seem likely.

2007 Jul 05 02:41 PM