Home Depot Stock Seen as a Bargain as Analysts Raise Earnings Estimates

Home Depot Stock

Analysts have been revising their earnings estimates for Home Depot (NYSE:HD) upward for this year and the next, making the stock appear attractive to value-oriented investors. HD stock is currently trading at 21 times its earnings, and its free cash flow has surged by 80% year-over-year in the first half of the year. This has led to its stock being considered a bargain at its current price of $319.73 per share as of September 18.

Analysts had initially projected an average earnings per share (EPS) of $14.95 for the fiscal year ending January 31, 2024. However, recent data from a Seeking Alpha analyst survey now shows that the average forecast has increased to $15.26 in EPS for January 2024, reflecting a 2.0% increase in earnings estimates since the company’s recent earnings release. At the current stock price, this translates to a price-to-earnings (P/E) multiple of 20.95x for the current year.

Looking ahead to the fiscal year ending January 2025, analysts are anticipating a 6.2% growth in EPS with estimates reaching $16.21. This places HD stock on a forward P/E multiple of 19.72x, which is considered attractive for value-oriented investors.

Morningstar data shows that the average forward P/E multiple for the past five years has been 21x, further supporting the notion that HD stock is in value territory. This assessment assumes that the U.S. economy will not experience a recession in the coming year and that the pace of home buying and renovations will pick up, possibly driven by the Federal Reserve’s decision to halt interest rate hikes or even lower them.

Additionally, Home Depot offers a decent dividend yield, currently at $8.36 per share annually, providing a 2.61% yield. The company has consistently increased its dividend for the past 13 years, and there is a possibility of another dividend hike following the next announcement in November. With a 4% dividend increase, the forward dividend yield estimate would be 2.72%.

Investors looking to generate additional income from their HD stock holdings can consider selling short out-of-the-money (OTM) put options. For example, the October 13 expiration period shows that the $310 strike price put options trade for $2.21 per contract. By selling these puts short, investors can potentially earn 0.71% in income.

The annualized expected return for this trade, assuming it is repeated 12 times, is 8.52%. More conservative investors can choose to short the $305 or $300 strike price puts, which produce lower income and yields of 0.48% and 0.333%, respectively.

In summary, Home Depot’s stock is viewed as a value play due to its low P/E ratio, attractive yield, and the potential for additional income through short-put option strategies.

Featured Image: Unsplash @ Jacob Rice

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