Home Depot (NYSE:HD) has been gaining steam recently as the housing market recovers. However, it is important not to base an opinion on a company on a change in the economic environment. It's far too easy to allow oneself to speculate when considering how a change in economic environment may affect a company going forward. Instead, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Home Depot fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.
HD data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$51.42|
|Value Based on 0% Growth||$30.14|
|Market Implied Growth Rate||9.51%|
Balance Sheet - July 2014
Earnings Per Share
Earnings Per Share - ModernGraham
HD Dividend data by YCharts
After reviewing the data, it is clear that conservative value investors may wish to seek other opportunities. The Defensive Investor is concerned with the low current ratio in combination with the high PEmg and PB ratios, while the Enterprising Investor has concerns with the high level of debt relative to the current assets. As a result, both investor types would find the company to be too risky to proceed. That said, any investors willing to speculate about the future of the company may go ahead with the next step of the analysis, which is a determination of the company's intrinsic value.
When calculating an estimate of intrinsic value, it is important to consider the historical earnings results along with the market's implied estimate for future growth. Here, the company has grown its EPSmg (normalized earnings) from $1.86 in 2011 to an estimated $3.55 for 2015. This level of demonstrated growth is fairly strong, and is within a margin of safety relative to the market's implied estimate of 9.51%. As a result, the company appears to be fairly valued at the present time.
Be sure to check out previous ModernGraham valuations of Home Depot for better perspective!
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