Home depot price trajectory uncertain, but i would still go long – home depot, inc. (nyse hd) seeking alpha power energy definition


With the annual dividend for 2018 set to come in at $4.12 based on current rates, along with a price to free cash flow ratio of 23.23x and a free cash flow per share of $8.067, we see that my projections slightly underestimated the dividend growth and overestimated the growth in free cash flow. However, this was not by a great margin and for this purpose, I am going to assume that my initial price target is still valid.

Assuming that we can still expect a target price of $201 in 2020, a current price of $187.42 would yield roughly a 7% upside from here. Strictly on the basis of this model, we can expect little price growth in Home Depot for the next couple of years. Key Drivers and Metrics

Coming back to my original argument – I made the prediction that a buoyant housing market in the United States would continue to drive revenues upwards. According to a recent Gallup poll, 64% expect house prices to rise in the next year, and two-thirds of respondents believe that now marks a good time to buy a house. This directly benefits Home Depot’s business as a home improvement provider, since house repairs are an inevitable cost of owning a home. The more Americans buy houses, the more repairs will need to be done on those houses – and Home Depot is a leading player in this area.

Specifically, much of Home Depot’s success has come through optimization of its omnichannel sales strategy – i.e. improvements in e-commerce, stores, upgraded distribution systems, and a greater variety of delivery options. The company is set to spend $5.4 billion on the upgrading of its "One Home Depot" vision. Moreover, Home Depot has grown its online sales by roughly $1 billion in the past four years, and this has accounted for approximately 20% of the company’s total growth. In addition, the company’s advertising budget for digital channels exceeds 50% of its total advertising spend. These improvements allowed the company to rejoin Gartner’s Supply Chain Top 25 for 2018.

When we look at recent financial data, we see that net sales are up by 4.4% in the past year, with gross profit up by 5.7%. Moreover, earnings per share saw a significant increase by over 24%. In this regard, Home Depot’s business is still thriving, and in my opinion there is little risk of a significant decline in this stock (barring any broader market related downturns).

With that being said, there is the risk that given the vibrant rate of growth that we have seen in the stock in the past couple of years, the stock would be under increasing pressure to sustain a 20%+ annual growth rate in earnings or free cash flow for the stock to continue rising.

However, Home Depot’s dividend growth has undoubtedly been quite impressive. The dividend payment has grown by an average of more than 20% on an annual basis, and the payout ratio for this company is less than 50%, indicating that Home Depot is continuing to invest significantly back into the business:

My stance is this – Home Depot may have a modest upside from a price perspective for the time being. Unless we were to see either a significant rise in the P/FCF ratio (as a result of increased investor interest), or a significantly higher rate of growth in free cash flow, then the company is likely to remain within the $180-200 range for the time being. That’s a conservative assumption, and it could well be the case that the stock moves higher in spite of my projections.

However, Home Depot is continuing to grow dividends very significantly, and thus I see this stock as a great choice from an income perspective at this time. The current yield is 2.20%, and assuming more dividend growth this yield would increase significantly when holding price constant. If you’re intending on holding Home Depot for the long-term, e.g. 5+ years, then this stock is a buy as far as I’m concerned. Dividend growth has been very impressive – and though the timeline is uncertain – Home Depot will be set for further price growth given the strength of its business model.