Calculating The Fair Value Of The Home Depot Inc (NYSE:HD)
Does the share price for The Home Depot Inc (NYSE:HD) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in February 2018 so be sure check the latest calculation for Home Depot here.
What’s the value?
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I use the analyst consensus forecast of HD’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.82%. This resulted in a present value of 5-year cash flow of $43,842.4M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how HD’s earnings are expected to move in the future, which should give you an idea of HD’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $147,862.7M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $191,705.0M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $164.17, which, compared to the current share price of $193.97, we see that Home Depot is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For HD, I’ve put together three essential factors you should look at:
1. Financial Health: Does HD have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does HD’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of HD? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
