Sunday, September 10, 2006

Home Depot - trading at a discount?

In the previous article we looked at Lowes and found that it is trading at approximately 30% discount to market value. We have looked at Home Depot in the past but havent considered if it is trading at a discount to market value or not. In this segment, we will do this analysis using the same approach as Lowes.

If we estimate that Home Depot's net earnings this year will be 15% higher than last, Home Depot earnings will come in at 6700 million dollars. To this we will add amortization/depreciation and subtract capex. Amortization/depreciation is to the tune of 3.6 billion dollars a year and the capex is about 6 billion. Taking out two billion for new stores, the total amount is about 6300 million dollars. Putting the cost of capital at 8%, this gives an EPV of 78.5 billion with no growth. Adding in the cash and inventory gives HD a value of 92.7 billion. Assuming no growth, this shows that HD is 25% under valued compared to its market value at the moment.

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