Enhanced Commercial Credit Offerings
May 03, 2022 – The company announced on 3rd May this year, Home Depot Ventures a venture capital fund which was created for the purpose of identifying, funding and partnering with companies who are operating in early-stage companies to accelerate and assist technologies which are emerging in the market. The company aspire to increase client satisfaction and influence the future of home improvement.
January 11, 2022 – The company announced to enhance its commercial credit offerings for the long-term customers and businesses. The Pro Xtra™ Credit Card, a new iteration of its Commercial Revolving Charge, was introduced by the company to help the pros to save time and money. For establishing a new Pro Xtra Credit Card, Pro Xtra members earn a $100 credit.
Fiscal year 2021 – The company has invested $2.6 billion in capital expenditure in the year 2021 for the purpose of enhancing experience of the customer. The company had returned around $22 billion back to its shareholders in the form of dividend and re-purchases of shares. The amount paid through dividends in the year 2021 equaled $7 billion and the amount returned back through share repurchases was equal to $15 billion.
Fiscal year 2020 Acquisitions – The company extended the reach in the MRO marketplace by acquiring the HD Supply, which was involved in the business of distributing MRO products to multifamily, hospitality, healthcare and government, housing facilities, among others. The legacy Interline Brands business into HD Supply.
Bernie Marcus, Arthur Blank, investment banker Ken Lang ore, and marketing specialist Pat Farrah launched Home Depot in 1978. A shop of home renovation and building supplies that offers a variety of products and services. The stock of the company is currently trading at a price of $305 the company has been able to prove its consistency in the sales and earnings growth since the past 10 years. The company is one of the major stocks in terms of market capitalization amongst the peers of the companies. The market cap of Home improvement retail industry has been calculated to be equal to $331.24 billion whereas Home Depot has a total market value of $325.55 billion which represents around 98 percent market share in the Home Improvement Retail Industry. Long-term clients and businesses will benefit from the company’s expanded commercial lending services. The firm created the Pro XtraTM Credit Card, a new generation of their Commercial Revolving Charge, to assist professionals save time and money. Pro Xtra members receive a $100 credit when obtaining a new Pro Xtra Credit Card. 2021 fiscal year – In the year 2021, the corporation will invest $2.6 billion in capital expenditures to improve the customer experience. In the form of dividends and share repurchases, the corporation has returned about $22 billion to its stockholders. In the year 2021, the amount paid in dividends was $7 billion, while the amount returned through share repurchases was $7 billion.
The company witnessed a rise in the level of revenue generated in the year 2022 which was equal to $151,157 million compared to a revenue figure less than $135,000 million in the year 2021. The company’s gross margins are also on the rise as the company has earned $50,000 million in the year 2022 compared to a profit of around $44,000 million in the year 2021. Along with the gross profit margin, the operating profit margin and the net margin of the company are also rising for the company in the past five years. According to the fourth quarter earnings of the stock of Home Depot, the company had surprised the market with slight earnings beat of $3.21 earnings per share compared to the analyst estimate of $3.18 earnings per share. The shares of the company have been under-performing the S&P 500 index returns for the past year which is down by around 8.76 percent. The stock of the company has fallen by more than 16 percent since the beginning of the first quarter of 2022. According to the Discounted Cash Flow Analysis of the company’s stock price, the intrinsic value of the stock is expected to be around $328 which is more than the current market price of the stock which is equal to $305. Hence, the stock of the company can be bought.
FY2021 Capital Expenditure
DCF model
The discounted cash flow model is a valuation technique which uses the future expected cash flows of the company to determine the equity value of the company. The assumption of the model is that the stock price of the company depends upon the future expected values of cash flows discounted at an appropriate discount rate which represents the cost of capital of the company. The free cash flow of the company is the amount of capital that the company has at disposal after meeting the obligations both internal and external. The free cash flow of the company is utilized by the company to pay off dividends and interest on capital borrowed. The financial statements were forecasted for the period till 2026 to estimate the level of free cash flows of the company.
The terminal growth rate of the company was assumed to be equal to 5.6 percent which is consistent with the growth rate of the economy for the longer term. It is assumed that a company cannot grow more than the GDP growth rate of the country the company operates into. The revenue of the company was expected to grow by 25 percent in the year 2022, and the growth rate is expected to reduce by 5 percent each till year 2026 when the growth rate is equal to 5 percent. The other components of the financial statements were forecasted to be growing on the basis of five-year average growth rate of each component. The cost of capital represents the appropriate level of discount rate which the company can use to discount the free cash flows of the firm. Since, the company had debt in the capital structure the WACC is the appropriate discount rate to be used for discounting the cash flows.
The company’s share price is expected to reach $328 in the future periods on the DCF analysis conducted using the above information. The most recent earnings report of the company showed that the company on the back of rising demand for tools and materials, have posted earnings beat. The company also decided to raise its dividend by 15 percent which would also push the price of the stock in the market. Competition from individuals wishing to update their surroundings or decorate their new residences was predicted to diminish as even more people entered the workforce. Despite a drop in sales, the average transaction size increased again, reaching the previous quarter’s level which is expected to continue in the years to come. The company has been experiencing growth in the DIY customer categories coupled with picking up digital momentum. The company’s strength across its businesses and geographies are the primary reasons that is expected to push the revenues of the company, improving the margins of the company in the future. Plans like ‘One Home Depot’ plan with a primary motive of increasing the supply chain, technological investments, and digital advancements, is expected to show considerable results in the future becoming the catalyst behind the convergence of the theoretical intrinsic value and the market value of the stock.
Acquisitions in FY2020
The risk to the price targets includes the wrong assessment of growth rates. The long-term growth rate of the GDP which was assumed to be equal to 5.6 percent is very important assumption as it helps to determine the terminal value of the stock. The terminal value of the stock is a component which takes up the majority of the value suggested by the DCF model. Hence, a wrong or inaccurate terminal value can significantly deviate the intrinsic value of the stock. The growth rate assumptions of the revenue of the company which is based on the average five-year growth rate can also prove to be inaccurate resulting in a different intrinsic value.
Home Depot was founded in 1978 by Bernie Marcus, Arthur Blank, investment banker Ken Lang ore, and marketing expert Pat Farrah. A home renovation and building supply store with a wide range of items and services. The company’s stock is now selling at $305 per share. The company of Home Depot Inc was involved in developing materials and products of improvement for homes and selling of the products to local retailers and across various countries. Building materials, home renovation items, lawn and garden supplies, and décor products are among the company’s offerings. The company has been operating into three major economies which include, United States, Mexico and Canada. The company provides home improvement installation services. The company also rents tools and equipment to common public and generates revenue from all the countries mentioned. The main driver of the company’s favorable performance has been the Home Depot’s Pro segment which have experienced a robust growth of capital and revenue. A demand for larger projects which were operating in the home improvement industry has been the main reason for the growth in the pro segment of the company. Contractors represents only five percent of the company’s total customers listed but it contributes more than 45 percent of the revenue that the company generates with the last sales recorded which was equal to $132 billion.
The Industry analysis and competitive positioning of the firm is performed using the porter’s five forces:
Bargaining power of suppliers – The company enjoys a superior bargaining power over the suppliers of the company due to the size of the company. Because of their size, suppliers have some influence, but in order to avoid losing customers, they normally exert less control.
Bargaining power of buyers – The nature of the business of home improvement, the buyer’s have a lower bargaining power. There are several other brands in the market which give an opportunity to switch easily between products. The company enjoys economy of scale to be relevant in this business.
Business rivalry – The Operating cost and labor and marketing costs, the threat of new entrants. The companies looking to join the industry would find it quite difficult to implement.
Threats of Substitute – There is a significant risk of replacement for Home Depot since there are many suppliers that give the same product at little or no cost to the consumer and there is a huge competition from local and small businesses.
Financial Highlights
Threat of entry – The company has created enough barriers by leveraging upon the loyal customer base that the company enjoys, the distribution network which is extremely strong in nature and the advance technologies which the company uses in its day to day activities.
Earnings
The net earnings of the company have risen by around $0.5 billion in the year 2022 with a figure of $3.4 billion in the year 2022 compared to net earnings of $2.4 billion in the year 2021. The diluted earnings per share of the company was equal to $3.21 which witnessed a jump of around $2.65 per share. The net sales of the company for the past three period also increased in the current year compared to the previous year with a sales value of around $357 billion in the year 2022 compared to $32.2 billion in the year 2021.
Sales/Revenue
The company is continuously increasing the growth rate of the revenue as the company has recently touched the mark of $36 billion. The company’s net sales grew in the past 3 months of the current year compared to the previous year, with a sales value of roughly $357 billion in 2022 vs $32.2 billion in 2021.The net earning after tax of the company was around $16.4 billion in the year compared to $12.8 billion experienced in the past year. The annual net sales of the company were equal to $151.157 billion which saw a jump in value from a figure of $132.110 billion.
Balance Sheet & Financing
The return on assets of the company for the year ended 2022 was equal to 22.86 whereas the ratio for the year 2021 was equal to 18.22. Compared with the past five years the company has been increasing the amount of sales generated by utilizing the assets of the company which is depicted by a rising Return on Assets ratio. The long-term debt to capital ratio of the company for the year 2022 was slightly higher at 1.04 compared to a value of 0.9157 which indicates that the company has taken up additional debt to finance operations.
Since the firm operates abroad in countries such as Canada, Guam, the United States, and Mexico, it is exposed to the risk of foreign currency fluctuations, which can affect the company’s sales and profitability. The latest conflict between Ukraine and Russia poses a danger to global stability, and the corporation is geographically exposed. The firm is prone to volatility due to global economic and political uncertainty.
|
2022 |
2023 |
2024 |
2025 |
2026 |
Year |
|
$143,876.6 |
$156,691.2 |
$180,194.9 |
$198,214.4 |
$208,125.1 |
$219,780.1 |
|
8.9% |
8.9% |
15.0% |
10.0% |
5.0% |
5.6% |
|
94,804.3 |
103,248.2 |
118,735.4 |
130,608.9 |
137,139.4 |
144,819.2 |
|
65.9% |
65.9% |
65.9% |
65.9% |
65.9% |
65.9% |
|
49,072.3 |
53,443.0 |
61,459.5 |
67,605.4 |
70,985.7 |
74,960.9 |
|
34.1% |
34.1% |
34.1% |
34.1% |
34.1% |
34.1% |
|
25,952.3 |
28,394.6 |
32,653.8 |
35,919.1 |
37,715.1 |
39,827.1 |
|
18.0% |
18.1% |
18.1% |
18.1% |
18.1% |
18.1% |
|
23,120.0 |
25,048.5 |
28,805.7 |
31,686.3 |
33,270.6 |
35,133.8 |
|
16.1% |
16.0% |
16.0% |
16.0% |
16.0% |
16.0% |
|
2,671.8 |
2,909.8 |
3,346.3 |
3,680.9 |
3,864.9 |
4,081.4 |
|
1.9% |
1.9% |
1.9% |
1.9% |
1.9% |
1.9% |
|
20,448.2 |
22,138.7 |
25,459.5 |
28,005.4 |
29,405.7 |
31,052.4 |
|
14.2% |
14.1% |
14.1% |
14.1% |
14.1% |
14.1% |
|
(1,379.5) |
(1,502.3) |
(1,727.7) |
(1,900.5) |
(1,995.5) |
(2,107.2) |
|
-1.0% |
-1.0% |
-1.0% |
-1.0% |
-1.0% |
-1.0% |
|
19,068.7 |
20,636.3 |
23,731.8 |
26,104.9 |
27,410.2 |
28,945.2 |
|
4,989.5 |
5,402.0 |
6,212.3 |
6,833.5 |
7,175.2 |
7,577.0 |
|
24.4% |
24.4% |
24.4% |
24.4% |
24.4% |
24.4% |
|
15,458.7 |
16,736.7 |
19,247.2 |
21,171.9 |
22,230.5 |
23,475.4 |
|
2,671.8 |
2,909.8 |
3,346.3 |
3,680.9 |
3,864.9 |
4,081.4 |
|
3,089.0 |
3,364.1 |
3,868.7 |
4,255.6 |
4,468.4 |
4,081.4 |
|
2.1% |
2.1% |
2.1% |
2.1% |
2.1% |
1.9% |
|
93.9 |
102.2 |
117.6 |
129.3 |
135.8 |
143.4 |
|
0.1% |
0.1% |
0.1% |
0.1% |
0.1% |
0.1% |
|
(2,677.9) |
(8.4) |
(15.3) |
(11.8) |
(6.5) |
(7.6) |
|
12,363.7 |
16,274.0 |
18,709.4 |
20,585.4 |
21,620.6 |
23,467.8 |
|
8.6% |
10.4% |
10.4% |
10.4% |
10.4% |
10.7% |
|
1.000 |
1.000 |
1.000 |
1.000 |
1.000 |
|
|
0.500 |
1.500 |
2.500 |
3.500 |
4.500 |
|
|
0.953 |
0.864 |
0.784 |
0.712 |
0.646 |
|
|
11,777.3 |
14,066.6 |
14,674.1 |
14,650.4 |
13,962.2 |
Figure 1: Income Statement
$ in millions
Source:
|
Present Value of Free Cash Flow |
|
|
Last year cash flow |
23,467.8 |
|
Discount raye |
10.2% |
|
Growth rate (Terminal) |
5.2% |
|
Capitalization Rate (k-g) |
5.0% |
|
TV |
468,842.5 |
|
PV factor |
0.646 |
|
PV of Terminal Value |
302,770.0 |
|
Plus: Sum of Present Value of Free Cash Flows |
69,130.5 |
|
Total Enterprise Value |
371,900.5 |
|
Indicated Total Enterprise Value |
$371,900.0 |
|
Indicated Total Enterprise Value |
$371,900.0 |
|
Less: Total Debt (current and long-term) |
$37,639.0 |
|
Add: Cash |
$7,895.0 |
|
Indicated Equity Value |
$342,156.0 |
|
Number of Diluted Shares Outstanding |
1,044.2 |
|
Indicated Value of Equity Per Share |
$327.66 |
|
Indicated Value of Equity Per Share, Average |
|
|
Price Per Share as of valuation date |
|
|
Decision |
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report holds a financial interest in the securities of this company.
The author(s), or a member of their household, of this report knows of the existence of any conflicts of interest that might bias the content or publication of this report. The conflict of interest is…
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does serves as an officer, director or advisory board member of the subject company.
The author(s) does not act as a market maker in the subject company’s securities.
A security is rated as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver positive returns that sufficiently compensate for the risks over the next twelve-month period. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.
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