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Corporate Profile

"Founded in 1978, The Home Depot, Inc. (NYSE:HD) is the world's largest home improvement specialty retailer with fiscal 2011 retail sales of $70.4 billion and earnings of $3.9 billion. The Home Depot has more than 2,200 retail stores in the United States (including Puerto Rico and the U.S. Virgin Islands and the territory of Guam), Canada, Mexico and China. The Home Depot's stock is traded on the NYSE and is included in the Dow Jones Industrial Average and Standard & Poors 500 Index." [from HD Investor Relations]

Home Depot reports earnings on May 15th before the markets open at 9:00am.

Current Analyst Estimates

The consensus analyst estimate for the company's Q1 2012 earnings are for earnings of $0.64/share and revenues of $17.77 billion. The earnings estimates from the 26 analysts covering the stock range between $0.59/share and $0.69/share while the revenue estimates range between $17.35 billion and $18.39 billion. The Q1 2012 earnings estimate represents an increase of 28% over a year ago while revenue comes in at an increase of 5.6% over the same quarter one year ago.

Analyst Consensus Estimate Trend

Consensus analyst estimates have been increasing steadily over the past 3 months. 90 days ago estimates were for $0.60/share, 60 days ago those estimates were $0.61/share, and 30 days ago they stood at $0.62/share.

Current Analyst Price Targets

Since the beginning of 2012, the only analyst recommendations have been reiterations of previous recommendations with slight adjustments to their price targets. On March 20th Deutsche Bank reiterated their hold recommendation while raising their price target to $50 from $48 per share. On February 22nd both UBS and RBC Capital reiterate their buy/outperform recommendations while raising their price targets to $53 and $54 from $51 and $48 respectively.

Ratio Analysis

To get a sense of the current valuation with respect to its competitors, below is the ratio analysis for The Home Depot compared to the ratios of its chief competitor, Lowe's (NYSE:LOW), as well as the industry and S&P 500 averages.

HDLOWIndustryS&P 500
Price/Earnings20.7221.6820.415.3
PEG1.471.42------
Price/Sales1.110.741.01.3
Price/Book4.412.313.42.2
Dividend Yield2.26%1.82%1.90%2.10%

Fair Value Analysis

The valuation of discounted cash flows is an effective tool in identifying the intrinsic value for well established companies. The input for the analysis is as follows:

Input
Revenue Growth Rate (Current Year / Ongoing)5% / 2.2%
Cost of Goods Sold (COGS)65.3%
Operating Expenses25%
Tax Rate31.8%
Weighted Average Cost of Capital (OTC:WACC)9%

Over the previous 5 years the company has managed to consistently lower their COGS and this is reflected in the 65.3% used in the analysis, a decrease of 0.4% from 2011. While Home Depot did manage to decrease operating expenses for 4 consecutive years, for the purpose of maintaining a conservative analysis this expense has remained unchanged. Home Depot has had a varying tax rate over the past 5 years, and so the average over that time period has been used. Finally the industry average WACC has been used to discount future earnings as necessary. The result is an approximate evaluation of $47.37, which places the stocks current valuation at an 8.49% premium to fair value as estimated above.

Company and fundamental data complied from: MorningStar, FinViz, TDAmeritrade, and Home Depot.

Source: Earnings Preview: Home Depot