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.