Home Depot (HD)

Total return at 5 years: 3.5%/year = 0.4% appreciation + 3.1% dividend. The target price ($344) is ex-dividend; the $52 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($337) and the other below.

Today — expensive, no margin of safety: at $337 trades ~4.8% above its value discounted to today (~$322); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($344) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$206.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($337) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (0.4%/year) than we project (5.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$17.4 bn of owner earnings in year 5 (vs ~$22.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: year 0 is the actual TTM to August 2026 (sales of US$169.2 billion and operating income of US$21.0 billion, XBRL; fiscal year ending in February). Home Depot is the world's largest home improvement retailer, plus the professional distribution of SRS and GMS. It is valued at the enterprise level on EV/EBIT over GAAP operating income, which already expenses the amortization of acquired intangibles (US$607 million in fiscal 2025); cash (US$2.1 billion) and financial debt (US$52.9 billion at Aug 2, 2026: short-term 4.2, current portion 4.7 and long-term 44.0) enter the bridge. The company also publishes adjusted operating income and adjusted earnings per share that exclude that amortization (adjusted earnings per share of US$15.24 in fiscal 2024 and US$14.69 in 2025); the model does not use them. The operating margin went from 13.5% (fiscal 2024) to 12.7% (2025) on the housing cycle and SRS margin dilution; the guidance reaffirmed on Aug 18, 2026 for fiscal 2026 is an operating margin of 12.4%-12.6% with sales +2.5% to +4.5%, and the base case starts at 12.6% in year 1 and gradually recovers toward 13.2% in year 5, with sales growing ~4% a year. Exit multiple of 14.4× EV/EBIT at five years (adverse 12.4× / favorable 16.4×), within the specialty retailer band of 12-17×: scale and a return on capital of ~26% place it near the center, disciplined by housing cyclicality. The present-value lens uses owner earnings before interest and subtracts the same net debt. No share path: the buyback has been paused since 2024 by the deleveraging after SRS.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $344 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $337, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $344 in 5 years plus $52 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $322. Against the current market price ($337), the margin of safety is -4.8% (trades above the maximum → a premium is paid) and the total return at that price would be 3.5% annually.

• EV/EBIT over operating income. It is valued at the enterprise level on EV/EBIT over GAAP operating income: the net debt that financed SRS enters the bridge instead of staying buried in a multiple on earnings.
• Premium over trough earnings. At ~18× operating income (depressed by the cycle), the market is paying for a housing recovery not yet realized.
• Multiple disciplined by cyclicality. The exit multiple is set at 14.4× EV/EBIT (the entry multiple at today's price falls to ~14× in five years): housing cyclicality does not justify paying the multiple of a stable business; the return comes from growth and the dividend.
• The DCF at the risk-free rate. The DCF (second lens, on owner earnings before interest and subtracting net debt) cross-checks today's value: at this multiple on trough earnings, the margin is moderate.
• Margin of safety applied at the end. At ~$337 the base return (~+3%) comes from the dividend (~2.8%) and from growth with the cycle; the margin is moderate — quality at a sensible price, not a bargain. Buying lower in the cycle would give more margin.
• Cyclical pessimism in the price. Part of the cyclical pessimism is already in the price, but not enough for a bargain: HD still trades at ~18× trough operating income.

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (107%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong and predictable cash generation. Free cash flow of ~US$15 billion over the last twelve months, robust even in the trough. It covers the dividend (~US$9 billion) and the SRS deleveraging. The cash of a quality retailer.
• Return on capital. ROIC ~26% (from 36.7%), well above the 10% bar — a high-return business, though diluted by the debt plus the equity from SRS. The business's quality has not broken down.
• Creates economic value. Yes — scale and leadership generate returns well above the cost of capital; the test is whether the SRS/GMS bet keeps ROIC up instead of permanently diluting it.
• Earnings cyclicality. Earnings are cyclical (housing): diluted earnings per share fell for two fiscal years (US$15.11 → US$14.23). It is not structural deterioration, but the cycle makes them less predictable than those of a consumer staples business.
• SBC immaterial. Stock-based compensation (~US$560 million, ~0.4% of sales) is immaterial → no trap: operating income already records it as an expense.
• SRS intangible amortization. The GAAP operating income the model values already deducts the amortization of SRS and GMS intangibles (US$607 million in fiscal 2025); the company excludes it from its adjusted figures because it is not a cash expense. Valuing on the GAAP figure is the more conservative reading and charges for the capital paid in those purchases.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

HD earns through transactions × ticket in retail (comparable sales = growth of existing stores) plus professional distribution (SRS/GMS). Traffic (transactions) is the signal of underlying demand: it fell in every recent period, and the comparable-sales recovery is ticket-only — the housing trough depresses visits and large projects. The operating flow is clean (SBC immaterial ~0.4%, free cash flow of ~US$15 billion over the last twelve months). The valuation uses GAAP operating income, which already deducts the amortization of SRS and GMS intangibles.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (2-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. Sales +3% real (comps +0.3% plus SRS plus modest FX); but earnings declined on the margin. Earnings growth depends on the comps recovery plus the margin, not on the top line.
• Where the engine comes from. Pro (>50% of sales) plus SRS/GMS (distribution for complex projects, cross-sell) is the structural engine; the retail comps recovery is the cyclical engine. Traffic is still falling — it is the weak point.
• Housing trough. Growth is depressed by the cycle: rates ~6.5%, low home turnover, large financed projects on hold. The recovery is the catalyst not yet realized (the market places it in 2027+).
• Realistic growth. The base case projects operating income from US$21.0 billion to ~US$27 billion in five years (sales ~4% a year and margin from 12.4% to 13.2%), with a gradual recovery in comparable sales and SRS maturing — not an instant rebound.
• Reinvestment runway. Ample: Pro and SRS/GMS have a secular runway (capturing the contractor's entire project); capex ~$4bn/year. The test is the ROIC of SRS/GMS ($23.5bn) against the goodwill.
• SRS dilution. The Other segment (SRS/GMS) dilutes the margin (2.5% vs 13.5%) and fell to 0.4% in Q1'26 on amortization plus mix — the thesis that it becomes accretive through cross-sell is still to be proven.

• Relevant in 10 years / recurrence. Yes — home improvement and maintenance are structural demand (the existing housing stock ages and gets renovated); recurring though cyclical. Pro adds recurrence (ongoing projects).
• Differentiated product. Of the 'scale retailer' type: the differentiation is convenience, assortment and execution, not a unique product. It competes with Lowe's, building-materials houses and the online channel.
• Share / position. The world's largest home improvement retailer (~$165bn), category leader alongside Lowe's. Scale and premier real estate.
• Pricing power. Moderate: the average ticket rose 2.8% in the second quarter of 2026, but competition from Lowe's and the online channel limits pricing power; tariffs on imports pressure costs.
• Operating leverage. The margin leverages with comparable sales: it went from 13.5% (fiscal 2024) to 12.7% (2025) with weak comparables and SRS dilution. The recovery in comparables and the maturing of SRS are the margin lever.
• Behavior in recession / cycle. Cyclical (housing): demand for large projects falls with high rates and low home turnover. The current trough shows it — it is the business's main vulnerability.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.1x
• ✓Interest coverage (EBIT / interest)8.8x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 107% of ROIC
• ✓Value creation (ROIC − 10% bar)+16pp
• ✓Malinvestment test (capex vs incremental ROIC)Productive investment (1.0x)
• !Float / working capitalConsumes cash $0.5 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage from SRS. Financial debt of US$52.9 billion at Aug 2, 2026, higher than that of a consumer staples business because it financed SRS (US$18 billion) and GMS (US$5.5 billion). Manageable (return on capital ~26%), but HD paused the buyback to deleverage — prudent.
• Positive book equity. Equity (US$16.6 billion at Aug 2, 2026) recovered from the legacy of massive buybacks: with the buyback paused, retained earnings exceed the dividend and equity grows.
• Cash generation. Operating cash flow of US$11.4 billion and capex of US$1.7 billion in the first half of 2026; it covers the dividend (US$4.6 billion in the half) and the deleveraging comfortably.
• Cyclical risk, not solvency risk. The balance-sheet risk is the cycle (earnings fall in the trough) plus the SRS integration, not solvency. Interest coverage is ample even with the SRS debt.
• SRS/GMS goodwill. Goodwill reached US$22.9 billion at Aug 2, 2026 on SRS and GMS; an impairment (if the integration disappoints) would hit GAAP earnings, not cash — a book-value risk tied to the professional bet.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Stated priority: reinvestment → dividend → buyback (paused for SRS deleveraging). Disciplined during the trough; the big bet (SRS/GMS $23.5bn) will define the verdict on allocation.
• Alignment / skin in the game. Professional management (insiders <0.1%, no founders); Decker holds 34.8× his salary in shares. Alignment through performance-tied compensation, not through founder ownership.
• The SRS/GMS bet. The acquisition of SRS ($18bn) plus GMS ($5.5bn) is HD's biggest bet: building out Pro distribution. Today it dilutes the margin; the test is whether cross-sell makes it accretive — a material execution risk.
• Internal promotion. Decker is a company veteran, and his temporary medical leave (Aug 12, 2026) was covered by two executives with decades at HD: Campbell since 1985 and McPhail since 2005. Continuity and deep knowledge of the business; the test is the handling of the trough and of the integration.

• The cyclical correction: earnings are depressed by the housing cycle (high rates, low home turnover) and earnings per share fell for two fiscal years — the market punishes the trough.
• SRS dilution confuses: the SRS and GMS acquisitions (US$23.5 billion) lower the consolidated margin (the Other segment earns 2.5% against 13.5% for retail) and add debt and intangible amortization, which depress GAAP earnings; the amortization does not consume cash and cross-selling is potential upside.
• It is cyclical selling, not structural: the business (scale, return on capital ~26%, professional customer above half of sales) is intact and comparable sales are already growing. The market is discounting the trough and housing uncertainty, not a broken franchise.

The perception-reality gap is moderate: HD trades at ~18× trough operating income, so the market already discounts a housing recovery that has not yet arrived. It is not a bargain; a high-quality business at a sensible price, more interesting if bought lower in the cycle.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -4%/year (-17% total): the margin of safety protects the downside. The bull (+10%/year, +62% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Prolonged housing cycle. If mortgage rates stay high (~6.5%+) and home turnover plus large projects do not recover, comps return to negative and earnings stall — the central disconfirmer.
• SRS/GMS integration. The Other segment dilutes the margin (it fell from 3.4% to 0.4% in Q1'26); if cross-sell does not offset the amortization plus the mix, the $23.5bn bet does not pay off and the debt weighs.
• Declining traffic. Transactions fell in every recent period; the comps recovery is ticket-only. If traffic does not return, underlying growth is fragile.
• Competition (Lowe's, online channel). Lowe's competes closely and the online channel (Amazon in some categories) is growing. The advantage is scale and the professional customer, but it requires constant investment.
• Tariffs on imports. Tariffs on tools, appliances and other imports pressure cost; HD is diversifying sourcing (≤10% from any single country) but it remains a live margin risk.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 26% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 3.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 26% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 0% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -7%/yr, bull-scenario ceiling +7%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: cost advantage, efficient scale, intangibles, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 0%, within what we project (6%) — the story squares with the numbers.