HOME DEPOT, INC. (HD) stock intrinsic value fair value estimate & owner earnings analysis

Home Depot is the largest US home-improvement retailer: 2,359 stores across the United States (including Puerto Rico, the U.S. Virgin Islands and Guam), Canada and Mexico, with online orders making up 15.9% of its $164.7 billion of fiscal 2025 sales. Since 2024 it has also been building a distribution arm for professional contractors: SRS Distribution (roofing, bought in June 2024 for about $17.6 billion) and GMS (wallboard and ceilings, bought in September 2025 for about $5.4 billion). In March 2026 SRS agreed to buy Mingledorff's, a 42-location HVAC distributor in the southeastern states; terms were not disclosed. All values below are per share, in today's dollars. HOW WE MEASURE EARNINGS. We start from operating cash flow and take out swings in working capital (inventory, payables, receivables, taxes payable), the cost of stock compensation ($522 million in fiscal 2025) and the capital spending needed to keep the existing business running ($3.6 billion of the $3.7 billion spent in fiscal 2025; only about $0.1 billion is treated as growth spending). Removing working-capital swings matters here: inventory absorbed $5.4 billion of cash in fiscal 2021 and $2.8 billion in fiscal 2022, then released $4.1 billion in fiscal 2023, which made reported cash flow lurch. On this basis owner earnings per share were $16.10, $17.07, $15.20, $15.45 and $15.39 in fiscal 2021 through 2025 (and $6.74 in fiscal 2016). The calculation reconciles to the company's cash flow statement to the million in every year; in fiscal 2025, net earnings $14,156M + depreciation and amortization $3,514M + intangible amortization $607M + stock compensation $522M + deferred taxes $418M + other $192M = $19,409M, which equals operating cash flow of $16,325M with the $3,084M working-capital outflow added back. Amortization of acquired customer relationships ($607 million in fiscal 2025, up from $186 million in fiscal 2023) is a non-cash charge and is added back; because those relationships wear out, we give the acquired businesses no growth credit and carry a permanent haircut for them in the downside case. DEBT AND THE EARNINGS LEVEL. Shareholders own what is left after lenders, so we value the whole business on the cash it produces before interest (owner earnings plus cash interest paid, $2.42 per share in fiscal 2025) and then subtract what is owed. Cash flow before interest was $17.30, $18.48, $17.01, $17.67 and $17.81 per share in fiscal 2021 through 2025. We use the median, $17.67, as the earnings level. That five-year window includes both the pandemic-era boom and three years of weak home-improvement demand, and the level stayed between $17.0 and $18.5 through both; earlier years describe a smaller business that predates SRS and GMS. We do not use the latest twelve months. First-half fiscal 2026 results (sales up 5.3% to $89.6 billion including acquisitions; net earnings $8.06 billion versus $7.98 billion, up 0.9%, with the first quarter down 4.2% and the second up 4.7%) are consistent with that level and did not move it. At the latest balance sheet (August 2, 2026) the company owed about $46 billion of senior notes, $4.2 billion of commercial paper and $3.1 billion of finance leases, against $2.1 billion of cash (we treat $0.7 billion as surplus; the rest is needed to run the stores). Total borrowings were $52.9 billion, down from $55.8 billion at the start of the fiscal year. As of February 1, 2026, scheduled note repayments were roughly $4.7 billion in the next twelve months, then $3.6, $3.1, $3.9 and $2.1 billion in the following four years, and $32.0 billion beyond that. The notes carry an average fixed interest rate of about 3.9%, locked in for decades in many cases; we credit that saving, which lowers the $46.0 billion of face value to about $40.3 billion, and we add $0.6 billion for the company's interest-rate swap liability. Net debt used is $47.5 billion, or $47.65 per share. Store and equipment operating leases are not subtracted because their payments are already inside operating cash flow. The company has paused share buybacks since March 2024 and has said it does not plan to resume them in fiscal 2026 while it reduces debt, so we credit nothing for buybacks. We could not confirm from the filings whether the Mingledorff's purchase has closed or what it cost; first-half fiscal 2026 acquisition spending was $1.3 billion and the balance sheet we used is after that spending. BASE CASE: $255.8 (business worth $303.5, less $47.65 of net debt, leaving $255.8). Cash flow before interest stays near $17.67 per share. The only growth credited comes from a proven, self-funded program: since fiscal 2023 the company has been executing a plan to open about 80 new stores over five years (finishing in fiscal 2027) and then 15 to 20 a year; it opened 12 in fiscal 2025 on a base of 2,359 stores. Because new stores partly relieve crowded existing ones, and acquired customer relationships wear out, we credit only 0.3% a year for ten years, 0.15% a year for the next ten, and none after that; the earnings then simply persist, because maintenance spending is already charged in full. Growth check: actual growth in fiscal 2025 was a decline of 0.4% in owner earnings per share ($15.39 versus $15.45) and a rise of 0.8% in cash flow before interest per share (1.0% in total dollars); year one of this case assumes 0.3%, below that. Left out: a recovery in home sales or remodeling, rising prices, better margins, buybacks, and any profit from GMS or Mingledorff's beyond what is already in results. GMS contributed about $2.0 billion of sales in its first five months, so a full year would add roughly $3 billion more, but its profit is not disclosed, so nothing is credited. BULL CASE: $319.1 (business worth $366.7, less $47.65 of net debt). Cash flow before interest grows 2.0% a year for ten years and 1.0% a year for the next ten: the store program on its announced schedule plus the ability to pass on cost inflation shown in fiscal 2021 and 2022, when owner earnings per share rose to $16.10 and $17.07, plus $0.30 per share for a full year of GMS sales at the company's own average cash margin. No housing recovery is assumed. BEAR CASE: $207.8 (business worth $255.4, less $47.65 of net debt). We replay the housing downturn of 2007 to 2010, when comparable-store sales fell 6.7%, 8.7% and 6.6% in three straight years and earnings from continuing operations fell from $4.2 billion in fiscal 2007 to $2.3 billion in fiscal 2008, about 45%. The same shape starts next year: owner earnings at 95%, 79% and 56% of today's level in years 1 to 3, then recovering to 59%, 68%, 76%, 84%, 88% and 90% in years 4 to 9, and staying about 10% below today's level afterwards (roughly 4% for the wearing-out of acquired customer relationships, the rest for another cycle later). No growth is credited. Cash flow before interest falls from $17.67 to about $11.0 per share at the trough (about $10.9 billion), still about 4.5 times annual interest of roughly $2.4 billion, so the debt stays serviceable and the maturities could be refinanced; but the $9.20 dividend would exceed owner earnings in years 3 and 4 and would likely be cut. HOW WE TESTED IT. The case rests on the earnings level holding through soft housing. In fiscal 2025 sales rose $5.2 billion, but acquisitions contributed $6.3 billion and the 53rd week in fiscal 2024 took away $2.5 billion; excluding both, sales rose about $1.4 billion, under 1%, which points to a flat level rather than erosion. MARGIN-OF-SAFETY PRICE: $115. We are fairly sure of the earnings level: five years of cash flow before interest inside a $17.0 to $18.5 range, reconciled to the cash flow statement, with underlying sales flat rather than falling. We are least sure of the depth and length of the next housing slump and of whether the company keeps buying businesses (three acquisitions in two years, each adding debt). The worst plausible outcome is a 2007-to-2010 style downturn on top of $52.9 billion of borrowings; the business would survive it because even trough cash flow covers interest 4.5 times and maturities are spread over decades, but the dividend would probably be cut and the shares would be worth about $208 on our bear case. If we are wrong that the level holds by 10%, value falls to about $225; if earnings instead erode 1% a year permanently, to about $200. The price assumes a holding period of about five years, during which the business pays a dividend: the $9.20 annual dividend is about 60% of owner earnings and would be 8% a year on $115. From $115, five years of dividends of about $46 plus an ending value equal to our bear case imply roughly 17% a year; with an ending value equal to our base case, roughly 21% a year. That is why the margin-of-safety price is $115 and not higher: at that price even the bear case comes close to the 20% target. CHANGE SINCE OUR LAST ESTIMATE. Our August 31, 2026 figures (bear $104, base $199, bull $319, margin-of-safety price near $118) were built on a different basis and are not comparable with these; nothing in the business has changed materially since.