Home Depot (HD)
Consumo discrecional / Retail de mejoras del hogar
The world's largest home improvement retailer, top-quality (ROIC ~26%), but cyclical (housing). It is in an earnings trough —adjusted earnings declined for two years— and trades at ~24× adjusted earnings, a modest premium that discounts a housing recovery that has not yet arrived → Fairly valued, with the return coming from the dividend (~2.8%) plus ~5.5% growth that depends on the cycle.
- Price
- $336.26
- Intrinsic value (5y, base)
- $371
- Total annual return (5y)
- 5.0%
- Status (nominal)
- Fairly valued
- Margin of safety
- +2%
The essentials
- The world's largest home improvement retailer (2,359 stores + the Pro SRS/GMS network). ROIC ~26% (high quality), but cyclical (depends on the housing cycle). Dividend $9.32 (156 straight quarters paid, yield ~2.8%).
- In an earnings trough: adjusted earnings declined for two years ($15.24→$14.69 EPS) on high rates (low home turnover, depressed large projects) plus SRS's margin dilution. Comps turning positive (+0.6% Q1'26), but it is ticket, not traffic.
- At ~$336 (down ~22% from its high) it trades at ~24× adjusted earnings, a modest premium over its history and Lowe's (~17-19×) → Fairly valued. Valued for a housing recovery (2027+) not yet realized; the return is the dividend (2.8%) plus ~5.5% growth with the cycle.
Intrinsic value — two valuation methods
Total return at 5 years: 5.0%/year = 2.0% appreciation + 3.0% dividend. The target price ($371) is ex-dividend; the $52 in dividends collected over 5 years are added separately.
By both methods, the value today (DCF $366 · Multiples $344) exceeds the market price ($336).
Pillars of the analysis
The verdict — today vs 5 years
Today — fairly valued: at $336 trades ~2.2% below its value discounted to today (~$344); the discount is positive but does not reach the margin of safety we require (≥38%).
At 5 years — En valor: the target price ($371) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.
The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$219.
Thesis
The business
HD is a top-quality retailer: the home improvement leader, with scale, premier real estate, ROIC ~26% and a growing Pro ecosystem. But it is cyclical: its earnings depend on the housing cycle, and today it is in a trough (adjusted earnings declined for two years on high rates plus the SRS dilution). It is not a broken business —comps turning positive, Pro >50% of sales— but a quality franchise at the low point of its cycle, with the housing recovery as the catalyst not yet realized.
The valuation
It is valued on P/E over adjusted earnings (which adds back the amortization of SRS/GMS intangibles, a non-cash cost of the acquisitions). Net income delivers equity directly; net debt ~$48bn (which financed SRS) lives in the DCF.
The base scenario projects a value of ~$371 per share over five years, an annual return of ~+5% from the current ~$336. The tension: HD trades at ~24× adjusted earnings —a modest premium over its own history and over Lowe's (~17-19×)— on earnings depressed by the cycle. The market is paying for a housing recovery it places in 2027+. As earnings grow ~5.5% (comps recovering plus SRS maturing) and the multiple disciplines toward ~19× (~17×, for cyclicality), the return is made up of modest appreciation plus the dividend (~2.8%).
The margin of safety
The verdict is Fairly valued: It trades close to intrinsic value, far from the required margin of safety.. At ~$336 HD has already fallen ~22% from its high ($427), but still trades at a modest premium (~21-22× forward) over trough earnings — the market is discounting the housing recovery before it materializes. The expected return (~+5%) comes from the dividend (~2.8%) plus ~5.5% growth that depends on the cycle, with the multiple disciplined by cyclicality. The margin is moderate: a top-quality business at a sensible price, but not a bargain —for that it would need to be bought lower in the cycle, or the recovery would need to disappoint and the multiple compress.
What to watch
The central disconfirmer: is the comps recovery real (traffic returning, not just ticket) or does the housing trough persist? The signals: customer transactions quarter to quarter (fell in every recent period — the recovery is ticket-only), mortgage rates and home turnover, and the Other segment's margin (SRS/GMS): whether cross-sell makes it accretive or it keeps diluting. And the resumption of the buyback (paused since 2024 for SRS deleveraging): its return would signal that the integration is complete and excess cash is flowing back to shareholders.
Educational / informational. Does not constitute investment advice.