HD Stock – is Home Depot’s Stock a Good Buy – Best Investments


Hey YouTube. I’m Jimmy and this video. We’re gonna walk
through my analysis of Home Depot ticker symbol HD. This continues our series we were
analyzing all 30 stocks in the Dow Jones Industrial Average. This the 13th video in that series you can see a link to all the other
videos in the description below. After we’re done with all of our analysis. We’re going to take all 30 companies that are going to try to build a
great portfolio a few different portfolios, a
dividend value and growth. So this type of business
is actually my favorite type of
business to analyze not necessarily home improvement but the type of business that’s easy to understand. And Home Depot keeps it simple for us. So in case you don’t know who they are. Well their a home improvement retailer they sell tools paint lumber electrical equipment plumbing equipment garden supplies appliances and a variety of other home
improvement products. Their purest competitor is Lowe’s which does almost exactly the same thing. Now there are a few risks to the
home improvement retailer that I think are worth
starting out with and keeping in the back of
our minds. I would say that there are three
primary macro economic risks to Home Depot’s business interest rates inflation and home prices. If interest rates move higher mortgages become more expensive more expensive mortgages in theory less people buy homes less people buy homes that hurts demand for the home improvement retailer on top of that rising interest rates often leads to rising
inflation. Now that hasn’t been too much of an
issue to this point but it is an issue to consider more specifically for Home Depot inflation specifically commodity inflation can be a problem because once again this affects demands for their products. If copper prices were to go crazy or timber or steel or any specific commodity Well it’s likely likely that the price of those particular products
copper might lead to plumbing supplies
being much more expensive. That could in theory hurt demand for that particular product. These are the types of risks that Home Depot is facing right now. Now although rising rates hurting
Home Depot’s business makes sense and it’s been in some of the news
recently. I’ve seen some analysts have
recently downgraded Home Depot where they’re raising question marks about they’re saying things like question marks around
the housing market are going to slow growth but I’m not sure history supports this theory. Here are the 10 year government bond
rates since 2010. And as we can see rates went up here and then they want to begin here and now they’re going up again more
recently. But when we overlay Home Depot’s
revenue on top of this chart we can see that revenue has consistently climbed every year. Sure it’s seasonal but overall they’ve been climbing quite nicely. And I’m not too sure it’s going to
slow so when I did some industry research
here’s what I found in 2005 the average age of homes in the
United States was thirty five years old. Now the average age of homes is
estimated to be over 40 years old. Older homes need more repairs. Another potential positive for the
home improvement industry is what I believe will be the trajectory of ownership since the housing crisis in 2007 and 2008. It would seem that people have been
spooked from homeownership. This chart is the from the US consensus bureau and shows the homeownership rate going back to 1967. And as we could see it looks like this rate is starting to improve. Now one big development that’s been
happening lately is that millennials are starting to
enter the housing market and assuming they continue to do so the gradual rise in interest rates which has been happening and expected to happen at least in
the near future is unlikely to derail the need for home improvement
products as more people buy houses especially as the average age of those houses continue to rise. So from everything I saw I was happy with the industry I think it has
potential over the long run. So now let’s dive a bit into the
numbers and to keep things in perspective. I think it would be helpful if we
were to consistently compare Home Depot to Lowe’s. So the first thing that I think is important is that Home
Depot is significantly larger than Lowe’s is a market cap of one hundred
ninety billion while Lowe’s has a market cap of
about 70 billion. Home Depot did one hundred five
billion in revenue over the past twelve months while
Lowe’s did about seventy one billion. When we look at the number of stores
that Home Depot has this that chart we can see that locations have been gradually rising over the past few
years. When we add Lowe’s we can see that Lowe’s isn’t terribly far behind
especially in the past two years. Now this is where we really dig into
the important stuff before we get to valuation. So this is a gross profit margins for both Home Depot and Lowe’s. Home Depot is the blue bars Lowe’s
is the red bars. And as we could see they both come
in at 34 percent. So what does this tell us. Well first thing that it tells us is that both Home Depot and Lowe’s have the same cost of goods which means that no one company has a significant economies of scale over the other company. Now we have EBITDA
margins. And interestingly now Home Depot is significantly better than
Lowe’s. Now these bars These cover the past 12 months and I was curious if this was just an unusual situation or if it’s truly the way it is. So here’s a chart for EBITDA margins for both companies going back to 2012 and there are two things that stand
out to me first. Yes Home Depot has consistently been better than Lowe’s and Second Home Depot is improving now jumping back to this chart. Now we add net income
margins and net income margins were once
again better 10 percent for Home Depot 6 percent for Lowe’s. So why the difference. Well one interesting statistic that I uncovered in my research was that not only does Home Depot have more
locations but they also have more sales per location. And I think the real point here is
that Home Depot appears to be a very efficient business. We can tell this by the gradual
improvement in margins the fact that they’re
doing more sales per location. Plus I really like their management
team in their last 10k management brought out the fact that they’re focusing
on two different areas growing market share with customers and focusing on delivering shareholder value. And then they listed a few
principles that guide them toward delivering
these goals. And one was delivering exceptional customer experience which I think is a great
thing and a disciplined approach to capital allocation and personally I think that great capital allocation is might be the most important thing. A management team can do to successfully run a company over the long run. So all of my research indicates that fundamentally Home Depot is a good company but that doesn’t mean we should just
jump in and buy it. First we calculate what we perceive to be the fair value of the stock. Then we go out and see if we can buy it for less
than that. So using analyst projections for
free cash flow here’s what our discounted cash
flow valuation came up with. Now just to walk
through it real quick. These analyst projections we used WACC of 8 percent and this is the calculation we used
to get to that 8 percent. And if you’re curious and if you want to know more about
this type of valuation technique we created videos on a lot of this. We have links to both our WACC
video and our CAPM video. Our CAPM is how you calculate the
cost of equity. We have links to those in the
description below. Then we use perpetual growth rate
of 2.5 percent which if you’ve seen any of
the other Dow 30 videos we’ve done generally this is a number we like to use. And if anything I can make the case
that it’s a bit more conservative but personally I prefer to be
conservative. If this were let’s say 3 percent well we could see that the fair
value jumps all the way to 214. So as you could see these inputs really matter and the goal here is to come up with something that we deem to be as accurate as possible and not just try to come up with something that pushes us to buy the stock because we like the fundamentals of the business. So jumping back to the calculation
at 2.5 percent we could see that today’s
value of the company is 222 divide that by shares outstanding. We come up with a fair value of one
to one hundred ninety seven dollars per
share. Now up until this point in my research I’ve yet to look at what the stock has done. I get to look at that chart on a
stock I want as often as possible for these calculations to
be done without being influenced by what the current price is. Once again I think that once we look at the current price we might get influenced we might adjust these numbers ever so
slightly to try to make it look like a better buy. And as you can see the current price
is one seventy per share. So according to our
calculation it seems that Home Depot has an
upside of about 15 percent or so not bad. And given that we really like the
company and management this might be a great add to all of our portfolios they have a dividend yield of a bit
over 2 percent. So decent dividend for our dividend portfolio and I was curious if this one ninety seven can be trusted. So I went ahead and looked at PE multiples for both Lowe’s and Home Depot. Home Depot’s current forward PE is about 17x Lowe’s is 15x. This difference makes sense when you consider what we uncovered
about the two businesses fundamentally. Now Home Depot’s one year average for their Forward PE is 20x so is a three year average. So as a five year average. So 20x seems like a fair number to use. So using 20x and analysts expectations for EPS going out over the next 12 months of I believe they have nine eighty
five is their projected EPA over the next twelve months. We get a fair value of one ninety
seven and the fact that these two numbers this and our discounted cash flow
are exactly the same. Is it coincidence in fact I don’t think I’ve ever seen
this before I think I’ve ever done a calculation with the two
numbers end up the same. Usually there’s a difference and we have to decide which number
is more appropriate. I probably would have gone with free cash flow because I I like that type of valuation technique
better. But in our case it doesn’t matter. So if nothing else this confirms our 197 number from discounted cash flow and it also confirms us going with a more conservative perpetual growth rate. Don’t forget. Had we done the 3 percent instead of2.5 would’ve
been to 14. The numbers were very not that it matters but it’s worth
considering. So my question is do you like Home
Depot here. Do you think that we should
add Home Depot to any of the portfolios all the
portfolios. Let me know what you think in the
comments below. And if you haven’t done so already
hit the subscribe button. Thanks for sticking around
all the way to the end of the video and seeing the next video.

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