Analysts have been raising earnings estimates for Home Depot (HD) for this year and next. The stock is trading at 21 times earnings. Moreover, its free cash flow was up 80% YoY in the first half. The stock is now attractive to value buyers at $319.73 per share on Monday morning trading on Sept. 18.
I discussed these points in my Barchart article on Aug. 15 after it released its results for the quarter ending July 30: “Home Depot Beats Expectations and Free Cash Flow Surges, Making HD a Value Play.”
Earnings Estimates Rise
In that article, I wrote that analysts forecast an average of $14.95 in earnings per share (EPS) for the year ending January 31, 2024. Now that same analyst survey by Seeking Alpha shows that the average forecast is for $15.26 in EPS for Jan. 2024.
That shows that since the earnings release these analysts have hiked their forecasts by 2.0% for the year. At today's price that puts HD stock on a price-to-earnings (P/E) multiple of 20.95x for this year.
Moreover, analysts are projecting a 6.2% gain in EPS for the year ending Jan. 2025 with EPS estimates of $16.21.
Value Territory
That means HD stock is on a forward P/E multiple of 19.72x. This puts the stock in value territory for many buyers.
For example, Morningstar reports that the average forward P/E multiple for the past 5 years has been 21x.
This assumes that the U.S. economy does not hit any kind of recession over the next year. Moreover, it assumes that the pace of home buying and renovations will pick up. That is likely based on a belief that the Federal Reserve has stopped raising interest rates and may start to lower them.
Another reason the stock is a value buy is that it pays a decent dividend. At $8.36 per share annually this gives HD stock a 2.61% dividend yield. Moreover, the company has consistently raised its dividend each year for the past 13 years. In fact, after the next dividend announcement in November, it's possible the company could raise the dividend again.
The market might be starting to incorporate this assumption in the price. So, for example, with a 4% dividend hike, the new dividend would be $8.69 per share. That gives HD stock a forward dividend yield estimate of 2.72%.
Another way to play this is to sell short out-of-the-money (OTM) put options for extra income.
Shorting OTM Puts in HD Stock
For example, the Oct. 13 expiration period shows that the $310 strike price put options trade for $2.21 per contract. That implies that the short seller of these put options can make 0.71% by selling short the $310 strike price puts.
This is seen by dividing the $2.21 received from selling the puts forward by the $310 strike price. In practice, this means that the short seller has to secure $31,000 in cash and/or margin in order to sell to open 1 contract at the $310 strike. The account will receive $221 immediately.
Keep in mind that this strike price is only 3% below today's spot price. More conservative investors might want to short the $305 or the $300 strike price puts. These produce less income and their yields are 0.48% and 0.333% respectively.
Nevertheless, these are ways to produce additional income for existing HD stock investors. For example, the annualized expected return for the $310 strike price, assuming the trade is repeated 12x, is 8.52% (i.e., 0.71% x 12).
Moreover, the $305 strike price short produces an annualized expected return (ER) is 5.76%. The $300 short has an ER of 4.0%.
So, since these ERs are relatively high, conservative investors might want to do a mix of these short plays.
The bottom line is that HD stock looks like a value play here, especially with its low P/E, high yield, and potential short-put income plays.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
