Novice Investing - Is Anybody Home?

Date: Friday 29th 2008f August 2008 12:23:11 PM

Is Anybody Home? - 08/15/2006

By: Novice Investing Staff

The largest home improvement company Home Depot Inc. (HD) guided at the lower end of its range this past Tuesday August 15th 2006. In a cautious statement, Home Depot expects full year sales to rise 14 to 17 percent and earning per share to increase 10 to 14 percent. A 12 percent gain in earning is equivalent to $ 3.04 per share.

With a high interest rate environment, Home Depot is conservative to plan lower growth ahead. Several home builders have also reported slower-than expected orders for new and existing houses in the United States. That, we believe, what led Home Depot to guide at the lower end of its estimate. For year 2007, Home Depot is expected to earn $ 3.33 which is an 8.7% increase from the previous year. With slowdown ahead (especially in the housing sector), conservative investor is prudent to NOT expect Home Depot to report earning growth at all.

Home Depot net cash has declined for several years in a row. At this moment, Home Depot has negative net cash of $ 4.152 Billion or $ 2.00 per share. Assuming a constant earning per share of $ 3.00 and fair P/E value of 12.5, Home Depot stock is fairly valued at ( $ 3.00 x 12.5 - $ 2.00 ) = $ 35.50 per share. The stock recently trades at $ 34.50 which is fairly closed to our fair value model.

At this point, Home Depot is neither overvalued nor undervalued based on current condition. However, to profit from investment, we need to evaluate what lies ahead in the future. That is what we have not figured out for Home Depot. In the short term, profit growth is expected to be mute due to the slowdown in housing and high interest rate environment.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Home Depot Inc. (HD) or any other securities.

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