Rebecca Jaffe is a Financial Analyst at I Know First. She graduated from the University of Texas in Austin with a BA in Economics.

Home Depot Stock Forecast: Leading the Home Improvement Market While Saving the Environment

“The Home Depot is committed to sustainability, and this wind development is just one example of that commitment,” says Craig D’Arcy, director of energy management for Home Depot

Summary:

Preserving the environment: Call2Recycle and Texas WindFarms

Past Financials and Ratio Analysis

Home Depot SWOT Analysis

I Know First Bullish Forecast for HD

Home Depot is a home improvement retailer that sells a variety of home material and building products. From garden, paint, and tool products to flooring, lighting, and cabinets, Home Depot has it. Home Depot also offers professional services, including remodelers, general contractors, and repairmen. Home depot is the largest home improvement retailer in the world, headquartered in Atlanta Georgia and operating over 2,000 stores across the United States, Canada, and Mexico. In 2016, Home Depot had sales of over $88 billion, earnings of $7 billion, and an Earnings Per Share of 5.46.

Call2Recycle

Recently, Home Depot announced that they have recycled more than one million pounds of rechargeable batteries in 2016 through its in- store take back program. partnered with Call2Recycle. Call2Recyle is a non-profit organization that provides battery recycling services consumers across the U.S, with more than 30,000 drop off locations including community centers, depots, and retail stores.. Call2Reycle is committed to protecting and preserving the environment through responsible battery recycling. Since the founding of Call2Recylce, over 130 million pounds of batteries have been kept out of landfills. Home Depot partnered with Call2Recycle in 2001 and in total has recycled more than eight million pounds of rechargeable batteries. The process is simple. Customers drop off their rechargeable batteries in a collection bin at a Home Depot store. The bins are then shipped to a facility for sorting, and later recycled.

Texas Wind Farm:

At the beginning of the year, Home Depot announced its first major investment in a wind powered renewable energy project. The energy purchased from Texas’s Los Mirasoles Wind Farm is suppose to power 100 HD stores and provide $150,000 in local community benefits.

Los Mirasoles Wind is owned and operated by EDP Renewables North America, located northeast of McAllen, Texas. To help decrease its carbon emissions, Home Depot signed a 20-year power purchase agreement (PPA). The annual purchase of 50 MW is a fifth of the project’s 250-MW capacity.

Home Depot has partnered with EDP Renewables in their energy conserving initiative. EDP renewables operates 41 wind farms all across the US.Home Depot’s goal is to acquire 135 megawatts of different renewable energy sources, including solar and win, by the end of 2020.

“The Home Depot is committed to sustainability, and this wind development is just one example of that commitment,” says Craig D’Arcy, director of energy management for Home Depot. “This is truly taking it upstream for us and how we operate our stores and really taking a big step in terms of the impact we have.”

Financial Ratios:

Below are financial statements of Home Depot and Lowes, their largest competitor. Followed, is an analysis of these financial statements using different financial ratios.

Over the past three years, Home Depot has had a higher current ratio than Lowes, meaning Home Depot is more efficient at paying back its obligations. Home Depot also has a high inventory turnover ratio, increasing steadily, while Lowes has been more volatile. This high ratio implies that sales are strong. If Home Depot’s turnover rate continues to increase, then sales should also continue to increase in the future.

Looking at Home Depot’s debt ratio and debt to equity ratio, we see that Home Depot’s debt has increased over the past three years and jumped substantially in 2016. The higher these ratios, the more leveraged the company, and therefore the more financial risk. Home Depot’s reliance on debt can potentially be problematic, if unable to pay back obligations. In addition, shareholders view debt to equity ratios to confirm the company is able to fulfill obligations to creditors in the event of a bankruptcy.

Gross Profit and Operating Margin tells us how efficient our company is at producing profit. Both Lowes and Home Depot’s gross profit margin are similar in percentage and is above the average in the home improvement market, 33.4% in 2016. If we look at operating margin, we notice a larger difference between the two companies. Home depot’s operating profit margin, 13% for 2016, is significantly larger than Lowes, 8.41%, while both Home Depot and Lowe’s gross profit margin are similar (34% HD and 34% Lowes). Operating margin indicates how much net income a company makes with total sales achieved. Unlike gross profit, fixed costs are included. Therefore, Lowes has high operating/fixed costs and is not as efficient in converting sales to profit as Home Depot.

Return on assets (ROA) is an indicator of how profitable and efficient a company is relative to its total assets The ROA for Home Depot is higher than Lowes, implying that HD is more efficient at investing in its assets to earn income.

Return on Equity (ROE) measures the rate of return on stockholders investment. A rising ROE suggests that a company is increasing its ability to generate profit shareholders have invested. The average ROE for the home improvement industry in 2016 is .23. Both Lowes and Home Depot are above this average, with HD significantly higher at 1.11.

Home Depot’s EPS in 2016 jumped by .75, a significant amount. This rise in EPS is due to a drive in revenue growth and share repurchases over the year. In the first three quarters of 2016, the company purchased 4.6 billion worth of shares. In 4Q, management expects to repurchases 2.4 billion shares. Share repurchases will lower the number of shares outstanding, therefore boosting the company’s EPS.

SWOT Analysis:

Strengths:

Leader in Home Improvement Market; Home Depot is the leading home improvement retailer, having over 2,000 locations and a well-known name. Lowes, their major competitor, earned about 30 billion dollars less in revenue in 2016.

Diverse Product: The diversity of Home Depot’s products contributes to its leading status in the home improvement market. All home improvement products and services are provided in one store, making it easy for customers to purchase products and have them installed in their home. This aspect gives a competitive edge to other stores like Costco or Walmart.

Weaknesses:

Dependency on economic conditions: During a recession, families must cut unnecessary costs, including extravagant costs like remodeling homes. Therefore, Home depot is dependent on the economy doing well so people are about to afford these extravagant costs.

Opportunities:

International Expansion: Currently, Home Depot has a presence across the U.S., Canada, and Mexico. Home Depot can expand their company to other geographical regions. In 2012, Home Depot shut down stores in China due to cultural mismatch. Although these stores were not successful, Home Depot should continue to expand internationally, creating new sources of revenue.

Expand Energy Renewal Resources:

Threats:

Economic Factors: If the economy goes into a recession, this would affect the home improvement market. Therefore affecting the profitability of Home Depot. Just as this factor is a weakness, it is also a constant threat to the company.

Competition: Although Home Depot holds the leading home improvement store title; their competition is a threat. Lowes is their major competitor, providing the same goods and services.

Weather: During ill weather conditions, Home Depot must postpone home projects. Therefore, the weather effects the Home Depot service department. Subsequently, Home Depot reports lower Q1 earnings than earnings in the rest of the quarters.

What the Analysts Say:

According to Yahoo Finance, Home Depot’s stock receives a “strong buy” from 11 analysts, a “Buy” from 13 analysts, and “Hold” from 8 analysts in the month of March. Over the past few months, Home Depot seems to have a bullish forecast from analysts on Yahoo Finance.

Conclusion:

Through our financial ratio and SWOT analysis, we see why Home Depot is given the title as the leader in the home improvement market. Home Depot is giving its customers a unique product, all while conserving the environment with its Call2Recycle program and new purchase of wind farms. These new investments and energy conserving will push Home Depot to continue its reputation of leader in home improvement market. My bullish stance on HD is resonated by I Know First’s algorithm as evident from the image below. The green 111.88 1 year forecast indicates that the algorithm is bullish on HD in the long term.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

I Know First originally issued a bullish forecast for Home Depot on January, 20 2016. Since this forecast the stock had steadily gained 23%.

This forecast on HD was sent to the current I know First subscribers on January 20, 2016.