Home Depot- Start Selling On Evaluations

The Home Depot, Inc. (NYSE: HD)                                                       11/16/2012

Last Price: $62.10

VIEW: START SELL

The Home Depot, Inc., together with its subsidiaries, operates as a home improvement retailer. The company’s stores sell building materials, and home improvement and lawn and garden products to do-it-yourself, do-it-for-me (at D-I-F-M), and professional customers. It also offers installation services for D-I-F-M customers.

Sector: Services                                                                        Industry: Home Improvement Stores

Highlights:

Home Depot is the one of world’s largest home improvement retailer. The company offers a level of service unprecedented among warehouse-style retailers. The Home Depot currently operates in the USA, Canada, Chile, Puerto Rico, and Argentina. The company also operates EXPO Design Centers across the U.S. and Villager’s Hardware in New Jersey. HD has a market cap of $92.37 billion. The stock closed yesterday’s trading session at $62.12. In the past year, the stock has hit a 52-week low of $36.41 and 52-week high of $64.44. Technical indicators for the stock are bullish but we believe the price at this level has discounted all the positive news.

GROWTH AND BALANCE SHEET

The Home Depot is a leading US-based home improvement retailer have benefited from the improvement of housing market. Beating the analyst consensus on operational, financial and strategic performance, the stock is trading near historic highs. The company has witnessed a 4.6% increase in its revenue. The operating income has gone up by 7.3% while the net income has also seen a 1.4% increase. The company’s gross margin of 34.7% is around peer median suggesting that HD-US’s operations do not benefit from any differentiating pricing advantage. The total Debt/Equity of 60.90% is high enough and above the industry average.

VALUATION

The business has 4 main product groups with somehow similar revenue contribution. The two groups that have biggest contribution were plumbing electrical and kitchen (30.5% of total sales), and hardware and seasonal (29.5% of total sales). HD has a PEG ratio of 1.27 at the industry average. Current PE at HD stands at 22.09, below the industry’s average of 24.00. The stock is currently trading above its intrinsic value of $59 this suggests that HD is overvalued at these levels. The beta of 1.03 implies low volatility of the stock with respect to the S&P 500. HD-US’s revenues growth has been below the peer median in the last few years -0.4% vs. 2.5% respectively for the past three years, the market still gives the stock an about peer median PE ratio of 22.09. The company has a current annual dividend yield of 1.90%.

RECOMMENDATION for next 6 months: We initiate our coverage with START SELL. The company has demonstrated a pattern of bullish technical signs but the big run in the past twelve months make it vulnerable to profit-taking. HD has gained 47.46% year-to-date, well ahead of the S&P 500?s 7.6% year-to-date gain. Our overall score for XLNX is 5.17

For options trading we suggest:

• Buy the January 2013 put with a strike of 55.00 priced at $0.42 per contract
• Net Debit to start: $0.42
• Maximum risk: Net debit

NEWS and CALENDAR

02/26/13                             Q4 2012 Earnings Release

Thursday November 15, 2012 – The Home Depot Declares Third Quarter Dividend of 29 Cents

Wednesday November 14, 2012 – Moody’s upgrades outlook on Home Depot

Tuesday November 13, 2012 – Home Depot’s 3rd-Quarter Net Up 1.4%; Co Beats Estimates, Raises Year View

HD Strengths

• Brand Name
• International Expansion
• Economies of Scale
• Customer Service

HD Weakness

• Increased Competition
• Housing Crisis

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

HD’s intrinsic value is $59.00 the current price is $61.25, the stock trades 4% above its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. HD’s annual EPS for the last 5 years were 2.27, 1.37, 1.55, 2.01, 2.47 this type of earnings action is not favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

HD’s Total Debt/Equity of 60.90% is not acceptable the industry’s average debt to equity ratio is 153.95%.

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

HD’s EPS growth for this quarter relative to the same quarter a year earlier is -5.00% well below our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

HD’s annual earnings growth rate over the past five years is -0.64%, below our target growth rate.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

HD’s 52 week high is $64.44 current price is $62.12, is 4% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 22.08 the average industry P/E ratio is 24.00 and is also below the S&P 500 P/E ratio of 15.30.

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.13% of HD stock. Management’s representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

HD is trading in the range of $58.75 – $64.44 in the past 30 days. The Commodity Channel Index (CCI) is bullish for HD. HD stock has been showing support around $60.90 and resistance in the $63.40 range. Our indicators give a bullish view on HD.

Home Depot Dividend History