Today, the company under the microscope is Home Depot (NYSE: HD ). Like many
gigantic companies that have been around for awhile, I regard Home Depot as a
stalwart. In other words, its still growing at a solid, modest and dependable
rate of under 10%, but more than 5% to 6%. Like all companies in this series, Im
also delving into all aspects of their business because Ive found a lot of
companies have surprising breadth. In this case, however, Home Depot is what we
all think it is: It sells building materials, home improvement products, and
lawn and garden products. It installs carpeting, flooring, cabinets,
countertops, water heaters and other large systems. What might surprise you is
its scale it has 2,245 stores, including a few in Canada, Mexico and China.
Home Depot has a major drawback, however. It is very sensitive to the economy,
particularly housing. When the housing market started to collapse in 2006, Home
Depots earnings fell by 60% through 2008. From a price just more than $40 a
share on Jan. 1, 2006, the stock hit $18.51 in October 2008. The good news is
private investors have swooped into the distressed housing market and are
buying, rehabbing and flipping houses in various markets across the country.
That means more business for Home Depot. Indeed, analysts are looking for
another 16% this year and 14% next year, along with five-year annualized growth
of 13.5%. Stalwart? Nuh-uh. Growth company. Still . How are the companys
financials following the housing crash? Things look fine. The company carries
$2.55 billion in cash against $10.73 billion in debt. Total debt service is at a
blended rate of about 5.6%. Thats cheap debt, especially considering trailing
12-month free cash flow is $4.45 billion. Thats also nearly three times whats
needed to pay the companys 3% dividend yield. Conclusion With a 13.5 P/E on
projected 2015 earnings of $4.23 per share, including reinvested dividends, we
get a price target of $57. Thats about an 80% total return from here, and the
company trades right at a 14 P/E. With the growth rate mentioned above, that
suggests to me that Home Depot is fairly valued at todays price. That means you
arent overpaying. In fact, a company as solid as this probably is deserving of a
premium multiple. So you might even be getting a slight bargain. It would be
totally reasonable to expect a 15% total return annually going forward,
including dividends. I believe Home Depot is a buy for regular accounts. I
believe Home Depot is a buy for retirement accounts. Disclosure: Lawrence Meyers
does not own shares of Home Depot.
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