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Home Depot (NYSE: HD) will be the stock in focus: (Price at time of writing: $126.25 as 21 October 2016)
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Background and overview of Home Depot (HD:NYSE)
HD is the largest home improvement retailer in the world. They sell any and everything related to DIY, home improvements and building projects. From power tools and hardware supplies to garden equipment to ordering custom made kitchen cabinets they cover it all. According to the company's website the company was founded in 1978. "When The Home Depot was founded in 1978, Bernie Marcus and Arthur Blank had no idea how revolutionary this new “hardware store” would be for home improvement and the retail industry.Today, we’re proud to be the world’s largest home improvement retailer. In more than 2,200 stores across North America, we aspire to excel in service – to our customers, associates, communities and shareholders. That’s what leadership means to us. That's The Home Depot difference"
Scroll over or click on the funnel chart to get more details of HD's latest financial results.
Financial review:
Home Depot is sitting on a net profit margin of 9.2%. So essentially for every $100 they receive they make $9.2 in profits after paying all expenses and taxes. Pretty strong net profit margins considering the competitive environment they operate in. Guess being the largest home improvements retailer in the world gives you some bargaining power when it comes to discussing cost of goods from suppliers.
Diluted earnings per share came in at $1.97 a share for the quarter. This places HD on a PE ratio of 17.1 (assuming the next two quarters will provide same earnings per share as the last quarter). The PE is not exactly the cheapest in the US market. Even Apple (AAPL) is trading at a lower PE ratio. HD is sitting on a dividend yield of 2.19% (assuming the next two quarters will provide same dividen per share as the last quarter).
Diluted earnings per share came in at $1.97 a share for the quarter. This places HD on a PE ratio of 17.1 (assuming the next two quarters will provide same earnings per share as the last quarter). The PE is not exactly the cheapest in the US market. Even Apple (AAPL) is trading at a lower PE ratio. HD is sitting on a dividend yield of 2.19% (assuming the next two quarters will provide same dividen per share as the last quarter).
Cash generated by operating activities for the 6 months (first two quarters of the fiscal year) amounted to $6877million (or roughly $5.55 a shares). That makes it about $2.77 a share in cash generated from operating activities per quarter. Showing HD is generating a lof of cash. At the end of the 6 months their cash and equivalents on their balance sheet was $4018million
Pie chart shows revenue earned per product category (for the fiscal year ending January 2016)
Pie chart shows revenue earned per product category (for the fiscal year ending January 2016)
From the pie charts above it's clear that HD has a wide variety of product catergories and they all contribute meaningfully to their revenue. There is not a dependence on one particular category to generate revenue from. For management this must be very encouraging and comforting knowning all products sold is contributing meaningfully to their revenue.
A little bit of a concern to us is the fact that in the 6months from Janary 31 ,2016 to July 31 ,2016 inventories went up by almost $515million (or 4.3%). Question is whether stock in their stores are not moving as fast as they had planned hence the increased build up of inventories? or are they expecting stronger sales and therefore carrying more inventories? In addition to this receivables owed to HD, I.e money owed to HD for goods supplied increased by $105million (or an increase of 5.56%) over the 6months period. Are their customers taking longer to pay them back for goods and services rendered? This is a concern as some of their clients might be defaulting on their payments and this will lead to write offs on HD's books.
A little bit of a concern to us is the fact that in the 6months from Janary 31 ,2016 to July 31 ,2016 inventories went up by almost $515million (or 4.3%). Question is whether stock in their stores are not moving as fast as they had planned hence the increased build up of inventories? or are they expecting stronger sales and therefore carrying more inventories? In addition to this receivables owed to HD, I.e money owed to HD for goods supplied increased by $105million (or an increase of 5.56%) over the 6months period. Are their customers taking longer to pay them back for goods and services rendered? This is a concern as some of their clients might be defaulting on their payments and this will lead to write offs on HD's books.
A few financial ratios for Home Depot (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 5.65 (more than 2 shows high levels of financial leverage). This high ratio shows that the company rather issues debt than raise funds from shareholders.
- Current Ratio: 1.30 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 0.46 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt). This ratio is a lot lower than the current ratio due to large amount of inventories HD carries.
- Return on Assets (ROA): 5.52%
- Return on Equity (ROE): 36.67%
- Net Profit Margin: 9.22%
- Dividend Yield: 2.19%
Valuation:
Based on HD current financial results we value them at between $125.30 and $125.64. We therefore feel that at it's current price it is close to being fully valued. It has dropped by about $10 in the last 3months but we feel it is currently trading at full value.
For South African investors, please remember exchange rate movements will have an impact on the value of your HD shares when the value is calculated in Rand terms.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question. Note this is not a binding valuation and investors should do their own research before investing in a specific share. Southafricanmi.com cannot be held liable for any losses incurred, We would accept donations on profits made though ;)
For South African investors, please remember exchange rate movements will have an impact on the value of your HD shares when the value is calculated in Rand terms.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question. Note this is not a binding valuation and investors should do their own research before investing in a specific share. Southafricanmi.com cannot be held liable for any losses incurred, We would accept donations on profits made though ;)
