The Home Depot, Inc. (NYSE: HD) — Equity Research
Conclusion
SELL — $322 intrinsic vs $370.81 (≈13% downside)
- Recommendation
- SELL
- Intrinsic value
- $322/share
- Market price
- $370.81
- Downside
- ≈13%
- Cost of equity
- 8.52%
- Revenue backtest
- ±0.3% vs 10-K
A full rebuild of an equity research valuation on Home Depot that flipped the call from a soft HOLD to a SELL. Using a fully circular free-cash-flow-to-equity model refreshed to live market data, the analysis lands on an intrinsic value of about $322 per share, roughly 13% below the $370.81 price. The core finding: Home Depot is the best operator in home-improvement retail, but the stock already pays in full for that quality and then asks for organic growth the numbers do not support. It is a SELL, not a short — the business quality is real, the price is not deserved.
The model — a driver-based FCFE rebuild
The rebuild kept the business-quality thesis but re-engineered the mechanics so every line is driven by the factor that actually moves it. Revenue is modelled as the company reports it — average ticket multiplied by customer transactions, with acquired SRS distribution volume on its own line — exposing that organic comparable sales have been negative for two years while a lower-margin distribution business carries the ~4% top line.
It is a fully circular, driver-based, three-statement build (debt↔EBIT↔interest, buyback↔shares↔dividends, cash↔interest income) where the income statement and cash flow tie, net PP&E stays realistic, and the balance sheet balances to a small residual.
Drivers of the call — cash flows, not the discount rate
Intrinsic value vs the market price
Refreshing cash flows — not the discount rate — moves the original $344 to $322, ~13% below the $370.81 price
Original vs rebuilt circular FCFE model (Ke 8.52%, g 3.0%).
The tempting story is that higher rates sank the stock; the analysis shows that is wrong. Refreshing both halves of the cost of equity, the risk-free rate rises (3.9% to 4.28%) while beta falls (1.03 to 0.95, Blume-adjusted), leaving cost of equity essentially unchanged at 8.52% versus the original 8.51%.
The fall from the original $344 to $322 comes entirely from cash flows on three fronts: real refinancing cost (cheap 2.5–2.9% pandemic-era notes maturing FY27–31 refinance near 5%, drifting the effective coupon from 3.9% toward 4.4%); honest deleveraging (SRS took leverage to ~2.37× EBIT versus a ~2× target, forcing negative net borrowing of about $2.2bn in FY2026); and weak organic growth recovering only to low-single-digit comps.
Risks and what would change the call
Rather than confining named risks to a sidebar, the rebuild puts them into the base case: housing and rate sensitivity in a slowly recovering traffic line, commodity risk in a margin path that does not expand much, leverage and integration risk in the deleveraging path, and interest-rate risk in the refinancing schedule. Live macro inputs support caution: the 30-year mortgage rate near 6.5%, existing home sales recovering slowly near 4.2 million a year, and low housing turnover.
The call would move back toward HOLD on a sustained return to positive organic comparable sales, a fall in the 10-year Treasury, faster SRS margin synergies, or a pullback toward the low $320s.
Validation and verification
The build carries a strong backtest: FY2026E revenue of $164.2bn lands within 0.3% of the reported 10-K figure of $164.7bn. Sensitivity analysis shows the stock only reaches its $371 price under a discount rate below ~7.5% or terminal growth above 4% — neither supported by the data — while the base case (Ke 8.52%, g 3.0%) yields $322. Supporting artifacts include the designed PDF report with appendix, the FCFE model workbook, and a shadow recalculation script.