Morningstar - Report 636d1777e26a17cb5799144a HD

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:23, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 23
The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
321.40 USD 263.00 USD 1.22 329.65 USD Bil Wide 2 Large Blend Medium Exemplary ;;;;;
15 Sep 2023 15 Aug 2023 19:00, UTC 14 Sep 2023 6 Sep 2023 05:00, UTC
Price vs. Fair Value
Last Close: 321.40

400 Fair Value: 263.00
15 Aug 2023 19:00, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
1.01 1.28 1.26 1.70 1.17 1.22 Price/Fair Value
-7.17 30.26 24.38 58.73 -22.06 3.74 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 15 Aug 2023 19:00, UTC.
Contents
Analyst Note (5 Sep 2023) Incentives and Speculative Building Have Boosted New-
Business Description
Business Strategy & Outlook (15 Aug 2023) Home Sales; We Now See More Starts in 2023
Bulls Say / Bears Say (15 Aug 2023)
Analyst Note Brian Bernard, CFA, CPA, Sector Director, 5 Sep 2023
Economic Moat (15 Aug 2023)
Fair Value and Profit Drivers (15 Aug 2023)
New-home sales have remained resilient despite worsening housing affordability in recent months amid
Risk and Uncertainty (15 Aug 2023) rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales
Capital Allocation (15 Aug 2023) through July were about even with the year-ago period, compared with a 22% decline in existing-home
Analyst Notes Archive sales. The key to homebuilders’ relative success this year has been their ability to improve affordability
Financials
by offering sales incentives, lowering base prices, and building smaller homes. According to the
ESG Risk
National Association of Home Builders, the share of builders offering incentives was 55% in August, up
Appendix
Research Methodology for Valuing Companies from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base
prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of on the tight supply of existing for-sale homes. Spec building also helps builders better manage
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please construction cycle times and costs.
visit: http://global.morningstar.com/equitydisclosures.
The primary analyst covering this company does not own its stock. New-home sales and single-family starts have been stronger than we had expected this year.
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1 Multifamily starts have also been running ahead of our expectations, but we still think they will slow
Rating.
next year as the market will need to digest a record number of units currently under construction. We
now project total housing starts to decline 10% year over year to 1.395 million units, up from our prior
1.295 million-unit forecast. We forecast total starts will decline about 4% in 2024, but that’s due to a
20%-plus decline in multifamily starts. We expect single-family starts will increase 6% next year. We
forecast the median new-home sale price will decline 4% this year, but homebuilders, which report
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:23, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 23
Sector Industry
t Consumer Cyclical Home Improvement Retail sales prices net of incentives, will likely report about an 11% decline in average selling price for new
orders. We think the median existing-home sale price will decline by a low-single-digit percentage this
Business Description
Home Depot is the world's largest home improvement year.
specialty retailer, operating more than 2,300 warehouse-
format stores offering more than 30,000 products in We don’t expect our forecast revisions to materially change fair value estimates across our U.S.-housing
store and 1 million products online in the United States, related coverage.
Canada, and Mexico. Its stores offer numerous building
materials, home improvement products, lawn and Business Strategy & Outlook Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
garden products, and decor products and provide various Home Depot is the world's largest home improvement retailer, set to deliver $153 billion in revenue in
services, including home improvement installation
2023. The firm earns a wide economic moat rating due to its economies of scale and brand equity.
services and tool and equipment rentals. The acquisition
While Home Depot has realized strong historical returns as a result of its scale, operational excellence
of distributor Interline Brands in 2015 allowed Home
Depot to enter the maintenance, repair, and operations and concise merchandising remain key tenets underlying our modest margin expansion forecast. Its
business, which has been expanded through the tie-up flexible distribution network should help elevate the firm's brand intangible asset, with faster time to
with HD Supply (2020). Moreover, the additions of the delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro
Company Store brought textile exposure to the lineup,
business. The success of ongoing initiatives should allow for modest operating margin expansion above
while Redi Carpet added multifamily flooring.
prepandemic levels longer term, despite inflationary pressures and near-term economic turbulence.
Over time, Home Depot should continue to capture sales growth, bolstered by an aging housing stock, a
shortage in home inventory, and rising home prices, despite lapping robust COVID-19 sales. Other
internal catalysts for top-line growth could stem from the firm’s efficient supply chain, improved
merchandising technology, and penetration of adjacent customer product segments (such as the
maintenance, repair, and operations, or MRO, market that Home Depot expanded its exposure to
through the acquisition of HD Supply). Expansion of adjacent categories (like textiles from the Company
Store acquisition) as well as existing ones (such as appliances) could also drive demand.
In our opinion, perpetual improvements in the omnichannel experience should support the firm's
competitive position, even as existing-home sales and turnover become more volatile. The commitment
to better merchandising and an efficient supply chain has led the firm to achieve operating margins and
adjusted returns on invested capital, including goodwill, of 15% and 36%, respectively, in 2022.
Additionally, Home Depot's focus on cross-selling products in both its DIY and its MRO channel should
support stable pricing and volatility in the sales base, helping achieve modest operating margin lift, with
the metric remaining above 15% on average over the next decade.
Bulls Say Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
u Home Depot's continued investments in supply chain and merchandising should improve productivity
and support its market leadership position in the home improvement market.
u The company has returned $70 billion to its shareholders through dividends and share buybacks over
the past five years, above 20% of its market cap. In our outlook, we forecast Home Depot returning
ß
Competitors
The Home Depot Inc HD Lowe's Companies Inc LOW Target Corp TGT Tractor Supply Co TSCO
Last Close Fair Value Fair Value

321.40 Last Close 139.00 220.00
220.02 Uncertainty : Medium Uncertainty : Medium
Fair Value Fair Value Last Close
Last Close
263.00 213.00 212.84
Uncertainty : Medium Uncertainty : Medium
123.05
Economic Moat Wide Wide None Wide

Currency USD USD USD USD
Fair Value 263.00 15 Aug 2023 19:00, UTC 213.00 29 Aug 2023 18:22, UTC 139.00 16 Aug 2023 21:46, UTC 220.00 7 Aug 2023 21:00, UTC
1-Star Price 355.05 287.55 187.65 297.00
5-Star Price 184.10 149.10 97.30 154.00
Assessment Over Valued 15 Sep 2023 Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023
Morningstar Rating QQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC
Analyst Jaime M. Katz, Senior Equity Analyst Jaime M. Katz, Senior Equity Analyst Noah Rohr, Analyst Jaime M. Katz, Senior Equity Analyst
Capital Allocation Exemplary Exemplary Exemplary Exemplary
Price/Fair Value 1.22 1.03 0.89 0.97
Price/Sales 2.10 1.42 0.53 1.60
Price/Book 240.76 321.82 4.74 11.10
Price/Earning 20.06 21.30 16.88 21.26
Dividend Yield 2.54% 1.93% 3.53% 1.88%
Market Cap 329.65 Bil 133.24 Bil 57.59 Bil 23.49 Bil
52-Week Range 265.61—347.25 176.50—237.21 120.75—181.70 181.40—251.17
Investment Style Large Core Large Core Large Value Mid Core
nearly $80 billion to shareholders over the next five years.

u The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-
double-digit share, leaving meaningful upside up for grabs.
Bears Say Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
u Weak consumer spending, higher interest rates, or an economic downturn could hinder sales for home
improvement projects and affect Home Depot's growth.

u IT and supply chain improvement gains could prove more challenging to achieve, as simpler efforts have
already bore fruit. Further productivity efforts could face some implementation risks, creating
inconsistent profitability.
u As the home improvement demand normalizes, consumers could continue to shift discretionary
spending away from home improvement and back into other discretionary categories like leisure and
restaurants.
Economic Moat Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
ß
We assign Home Depot a wide economic moat. As the largest global home improvement retailer, we
believe Home Depot possesses a competitive edge owing to its brand intangible asset and cost
advantage. Over the past 10 years, Home Depot's sales growth has outpaced the building materials and
garden equipment and supplies dealer industry's average growth of 6.2% by 160 basis points annually
(based on the U.S. Census Bureau data), an indication of the brand's ongoing relevance. We surmise
Home Depot's strong brand equity and extensive scale should enable incremental market share gains in
a highly fragmented $950 billion North American home improvement market, on top of the high-teens
market share it has amassed thus far (given roughly $157 billion in sales in 2022).
Dissecting the components of its competitive prowess, we think Home Depot's impressive same-store
sales growth, which has averaged 7% over the past 10 years, suggests a brand intangible asset exists.
For one, we think Home Depot's extensive product offerings and services have fostered brand loyalty. In
fact, Home Depot moves 30,000-40,000 stock keeping units in store and 1 million units online, allowing
consumers to save time and effort by visiting one shop for all a project's needs. To continue to engage
its consumers and keep up with changing customer demand (for localization and personalization, for
instance), Home Depot leverages consumer data, collaborates with its suppliers, and conducts periodic
merchandising resets to better refine its assortments. Apart from its trusted national brands, Home
Depot holds eight private-label brands that primarily cater to its DIY customers, who tend to be brand
agnostic; we think those brands not only allow broader product selection and brand positioning but also
provide margin benefits (while not disclosed, we estimate private-label gross margins to be a few
hundred basis points above national brands). Additionally, Home Depot's value-added services
(including tools and trucks rental, installation, and remodeling) allow smooth undertaking of projects for
its wide range of consumers, which further elevates the customer experience, in our view.
An important aspect of Home Depot's brand intangible asset lies in its perpetually improving
omnichannel capabilities; we think these protect the firm's competitive position and prevent customer
attrition by enabling customers to buy what they want how they want. While Home Depot maintains an
extensive brick-and-mortar presence, it has been investing heavily in its digital and omnichannel
capabilities for decades, which has allowed the firm to remain relevant in the market, in our view. For
Home Depot, nearly half of e-commerce transactions (which we estimate represented around 15% of
2022 sales) were ordered online and picked-up in store, implying more than $10 billion worth of goods
stemmed from an omnichannel transaction. For perspective, online penetration was just around 7% in
2017, but we expect it can continue to remain around a midteens rate in the near term as buy online
pickup in store and other omnichannel efforts continue to be adopted across the overall consumer base.
We expect omnichannel will continue to evolve based on customer-led demands, which will help
protect brand position.
Moreover, with consumers increasingly favoring retailers with a robust omnichannel presence, retailers
without capabilities to offer a seamless multichannel shopping experience could struggle to attract
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customers, in our view. We surmise operators that were less equipped to compete with the online
incumbents and omnichannel retailers likely ceded share to Home Depot and Lowe's during the
pandemic, as consumers acclimated to different transaction preferences. Home Depot's omnichannel
footprint combined with continued improvements in merchandising strategy and product offerings
should support the brand, in our opinion, driving same-store sales growth of 3% on average through
2032. In addition, we think these efforts should prompt further market share gains, albeit at a slower
cadence than historically, given a mature home improvement market and where Home Depot sits in its
business lifecycle.
Beyond its product offerings, we think Home Depot's emphasis on topnotch customer service and
associate knowledge further supports its brand intangible asset. And we attribute Home Depot's
superior service levels to the firm's commitment to invest in its talent through various training and
career development opportunities, competitive benefits, and a wellness package, to name a few. The
net promoter score (which we use as a proxy for customer satisfaction) at Home Depot is ahead of that
at wide-moats Lowe's and Walmart according to comparably.com, and employee surveys, which gauge
worker satisfaction, have been positive. We think Home Depot's continued investment in its people (in
2023, the firm announced $1 billion in investment for frontline, hourly workers) should help the retailer
deliver reliable services to its customers and remain on top of customers' minds for any home
improvement needs.
Additionally, since 2015, acquisitions have helped Home Depot elevate its brand by expanding the
product breadth and relevance for its professional segment. Here, key tie ups to Home Depot's business
have been Interline Brands and HD Supply (acquired in 2015 and 2020, respectively), through which it
deepened its foothold into the maintenance, repair, and operations, or MRO, market that primarily
caters to the pro customers—with a total addressable pro market size around $475 billion (according to
recent estimates from Home Depot). For reference, Interline Brands and HD Supply generated around
$1.6 billion and $8 billion in sales, respectively, at the time of the acquisitions (expanding its pro
penetration by a high-single-digit level). These deals also struck us as strategically cogent, given Home
Depot can leverage these opportunities to cross- and up-sell, through which it can attract new
customers and expand engagement from its existing pro base; we partially attribute the firm's strong
average ticket growth (growing from $57 in 2013 to $90 in 2022, up 58% cumulatively) to its ability to
successfully grow its pro customers.
From our vantage point, the pro offering is a key differentiator of the brand, as indicated by the
frequency (number of transactions) and the wallet share (average ticket in dollar term) that we assume
can generally outpace the DIY cohort. To further entrench its standing with the pro cohort, Home Depot
has worked to beef up its loyalty rewards program and enhance its service levels, which we believe
have resulted in consumer stickiness. For example, the Pro Xtra program allows for rewards, special
ß
sales, and discounts on certain categories, leading to meaningful savings for those undertaking sizable
projects, nudging pros to stay with one brand. In addition, we think Home Depot's exclusive services
catered to its pros (such as time-saving pro checkout, call-ahead ordering, and delivery to job sites, to
name a few) further enhance the shopping experience. Through both organic and inorganic means,
Home Depot's pro mix shifted from 30% in 2013 to nearly half in 2022, with the rest generated from do-
it-yourself, or DIY, customers. Assuming no additional MRO acquisitions ahead, we think continued
investments should help pros stay engaged with the brand.
Beyond its brand intangible asset, we believe Home Depot's size (operating more than 2,300 stores
throughout the United States, Canada, and Mexico) has allowed it to manage large volumes and
disperse merchandise across a geographically diverse network of stores to target specific markets,
underpinning a cost advantage. The magnitude of the business enables significant bargaining power
with vendors when sourcing products, crafting advertisements, and arranging logistics. We think the
symbiotic relationships Home Depot maintains with its vendor partners are unlikely to be replicated
easily, considering the current market landscape and the time and capital involved in scaling up to 1,000
locations, a minimum level we think would be required for any competitor to capture similar vendor
pricing as Home Depot. As quantitative evidence, Home Depot's operating margin (15.3% in fiscal 2022)
outpaces those of its competitive set by a couple hundred basis points, supporting our argument that
the firm can generate a superior level of leverage over a fixed cost base thanks to its scale (despite
continued capital investments to improve the business).
Home Depot's ability to negotiate well with vendors allows the firm to provide value and instill customer
loyalty by passing along a portion of these savings in the form of everyday low pricing, or EDLP. The
ability to apply EDLP tactics is a result of negotiating clout due to scale as savings from bulk purchases
that allow for this pricing mechanism. We think EDLP drives a positive flywheel effect, prompting
customers to return as they understand the value proposition offered by the company driving further
scale gains. As evidence, total transactions at Home Depot remained at 1.7 billion in 2022, from 1.4
billion in 2013 (up 20%). Additionally, we assess the pricing strategy as successful given the stability of
gross margins, which have generally clocked in the 33%-34% range over the past decade —a level we
believe will likely persist as any scale benefits gained are likely to be passed directly on to consumers.
In our opinion, it would be difficult for another retailer to enter the market and threaten Home Depot's
position, as smaller retailers would have a hard time building vendor relationships strong enough to
undermine the company's pricing prowess. While the threat of manufacturers creating their own retail
network could jeopardize the availability of product in Home Depot's retail channel, we doubt such an
endeavor would be successful in the longer term. In our opinion, manufacturers would be poised to
move more products by maintaining a beneficial relationship with a wholesale network like Home
Depot, rather than on their own. Thus, we are confident that Home Depot's competitive position will
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continue to benefit the business, indicated by our forward ROIC metrics remaining north of our 8%
weighted average cost of capital over the next two decades (with ROICs forecast to ultimately reach
38% in 2032), underpinning our wide-moat rating.
Fair Value and Profit Drivers Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
We are increasing our Home Depot fair value estimate to $263 per share from $259 to account for
better-than-expected second-quarter results ($42.9 billion in revenue and $4.65 in diluted EPS
outstripped our $42.1 billion and $4.45 preprint estimates, respectively) and time value. For fiscal 2023,
we now expect $153 billion in sales, a 14.3% operating margin, and $15.32 in EPS.
Given the maturity of the domestic home improvement industry, we expect demand to largely depend
on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards.
We project 2.4% average sales growth over the next five years, supported by 2.0% average same-store
sales increases and helped by offerings like buy online/pickup in store and better merchandising, which
drives market share gains. Longer term, we forecast gross margins to expand modestly over the next
decade (by 10 basis points from 2022 levels, to 33.6%) while the SG&A expense ratio remains flattish
(around 17%) as the firm capitalizes on its scale and supply chain improvement initiatives while
investing to protect its market leadership perspective. This leads to a terminal operating margin of
15.5%, higher than the 15.3% peak achieved in 2022.
Home Depot's operating margins and ROICs could improve as the firm focuses on the efficiency of the
supply chain and the opportunity to better penetrate the pro business with market delivery centers that
leverage its delivery capabilities. Additionally, we think Home Depot still has other opportunities to
expand the business. It can capitalize on product lines with weak market share leaders, as it has
previously done, for example, in appliances (as Sears faltered). Also, having deeper product lines to
cross-sell (with brands like Company Store offering exposure to textiles and HD Supply reaching the
MRO consumer) could add incremental revenue potential. The service business backed by a major
national brand, as well as the commercial business coming from Interline and HD Supply, could build
brand loyalty and keep consumers returning to a trusted source, something that could be hard to
duplicate for a new entrant.
Risk and Uncertainty Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
We give the company a Medium Uncertainty Rating owing to its strong brand recognition, which has
helped stabilize sales through the cycle. Home Depot's sales are largely driven by greater consumer
willingness to spend on category goods, with stable existing-home price growth and decent turnover.
Thanks to the maintenance, repair, and operations (MRO) business (Interline Brands and HD Supply),
pro revenue could be less cyclical, as the maintenance side of the business can prove more consistent.
In uncertain economic times, consumers remain in their homes, embarking on improvement projects,
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boosting do-it-yourself revenue. Alternatively, when home prices rise, the wealth effect generates a
psychological boost to consumers, reinvigorating professional sales thanks to a higher willingness to
spend on big projects. A diverse consumer base helps normalize revenue even in uneven times.
Currently, about half of sales are in the do-it-yourself arena, while the rest is generated from the pro
customer.
Although new competitors could set up shop on Home Depot's turf, we think new players would be
hard-pressed to offer similar product prices, as it likely wouldn't have vendor relationships of the same
magnitude. Ultimately, the biggest brands in home retailing will still want the biggest partners for
distribution, leaving a new peer in a precarious position when it comes to acquiring enough of the most
sought-out products to satisfy demand.
In our opinion, Home Depot has minimal environmental, social, and governance risk. Product sourcing,
potential data theft, and consumers' shift in preferences to sustainable product offerings are relevant,
but Home Depot should be able to adapt and do not see any material financial impact from these
factors.
We believe the biggest risk is a slowdown in the real estate market, signaled by increased home
inventories for sale, slower price growth, or higher mortgage rates (up about 170 basis points in the last
12 months).
Capital Allocation Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
Our capital allocation rating for Home Depot is Exemplary. Forecast adjusted returns on invested capital
including goodwill (34% on average over the next five years) are set to handily outpace our weighted
cost of capital estimate (8%) over our entire outlook, and the balance sheet remains sound, given the
company's medium revenue cyclicality and decent operating leverage. A manageable level of debt is
coming due over the next few years, and as such, we aren't concerned about capital demands. With net
debt/EBITDA that should average around 1 times over the next decade, there is plenty of financial
flexibility on the balance sheet.
Ted Decker took the reins from prior CEO Craig Menear as of March 1, 2022. Like Menear, Decker has a
long history with the organization, and as such, we suspect he will follow Menear's strategic suit,
including a disciplined focus on keeping the brand elevated. In 2019, longtime CFO Carol Tome
announced her resignation. Richard McPhail moved into the position in September that year, and thus
far the financials have been managed similarly; this is not surprising, given his lengthy tenure working
under Tome.
We hold a positive view of Home Depot's investment strategy, as we think the company is spending
strategically to maintain its competitive advantages and respond rapidly to evolving consumer demand
patterns. Quantitatively, we believe this is supported by robust ROIC and improving operating margins
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(which reach 15.5% over our forecast).
We deem cash distributions as appropriate, with the management team returning capital to
shareholders when optimal. It suspended share repurchases early in the COVID-19 cycle but was able to
restart opportunistic purchases in the first quarter of 2021 thanks to the strong demand that has
persisted throughout the pandemic. Home Depot has consistently raised its dividend in recent years
(with 17% average dividend per share growth over the past five years), and it did so again in 2023,
further returning excess capital to shareholders.
Analyst Notes Archive
Home Depot Earnings: Lingering Macro Concerns Pressure Big Tickets, but Brand Cachet Intact
Jaime M. Katz, CFA, Senior Equity Analyst, 15 Aug 2023
Although fiscal 2023 appears to be a year of moderation for wide-moat Home Depot, its second-quarter
results were solid—$42.9 billion in revenue (down 2%) and $4.65 in diluted EPS outstripped our $42.1
billion and $4.45 preprint estimates, respectively. Incorporating the outperformance, time value, and its
reaffirmed guidance of 2%-5% decline in sales and 7%-13% drop in diluted EPS (versus our respective
forecasts of 3% and 8% declines), we are increasing our fair value estimate by a low-single-digit
percentage to $263 (from $259). However, we think market expectations are lofty and shares seem to be
priced for perfection, trading roughly 25% north of our intrinsic valuation. As such, we’d suggest
investors remain on the sidelines.
Comparable store sales ticked down 2%, with a 1.8% drop in transactions and flat average ticket growth
(including a 160-basis-point headwind from lumber deflation). More critically, big ticket transactions
(purchases over $1,000) fell 5.5%, reflective of softer consumer sentiment as they opted to take on
smaller, less discretionary projects. Still, pro sales outpaced DIY sales in the quarter (qualitatively
stated), with pro backlogs hovering well above the historical average, albeit at a lower level
sequentially. On a positive note, management highlighted benefits witnessed from its $1 billion wage
investment for front line workers (which we’ve viewed as essential to support its brand intangible
asset), with improved attrition rates, staffing levels, and productivity resulting in higher customer
satisfaction.
Looking ahead, we believe the pro business (nearly half of sales) will remain the firm’s key growth
driver, as Home Depot intends to capture incremental share by expanding its reach to complex pros
while prudently investing in merchandising and technology, giving us confidence in our 4% average
sales growth by fiscal 2032 (beyond fiscal 2023). Still, continued investment bounds our long-term
operating margin outlook at 15%-16%.
Home Depot: Judicious Investments Set To Support Brand Prowess and Low-Cost Position Erin Lash,
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CFA, Sector Director, 14 Jun 2023

At its June 13 investor day, we confirmed our belief that Home Depot’s firm commitment to funnel
investments into diverse facets of its business (technology, stores, merchandising, product innovation)
should help it to maintain its market leadership position and brand strength, underpinning our wide
moat rating. While fiscal 2023 looks challenging due to a tough macroeconomic backdrop and softening
demand (we forecast 3% decline in sales and 9% drop in diluted EPS, both within the guided range),
fundamental demand drivers for the home improvement market (home equity and aging housing stock)
remain favorable. As we maintain our long-term prognosis for the business (low-single-digit average
top-line growth and midteens operating margins by fiscal 2032), we don’t plan a material change in our
$259 fair value estimate. Shares continue to strike us as rich, trading at a 15% premium.
Home Depot’s plan to elevate its pro ecosystem through targeting “complex pros”—largely renovators
and remodelers, representing a $200 billion market where Home Depot remains
underpenetrated—seems prudent. With dedicated sales professionals, we believe Home Depot’s one-
stop-shop value proposition should resonate with this cohort that normally sources from 10-plus
suppliers for a single project. Given the nearly 350 basis points of outperformance it has witnessed in its
Dallas pilot market, we think Home Depot can further cross-sell its wide array of product categories as it
targets a further 40 markets across the U.S. over time, while leveraging its pro loyalty program, digital
tools, and fulfillment infrastructure. That said, considering our limited visibility on such rollouts, we
maintain our 3%-4% consolidated annual sales growth forecast. Further, we expect the 80 new stores
Home Depot aims to open over the next five years to relieve high volume stores and enhance the
customer experience. Taken together, these investments should amount to 2% of sales, in line with
historical levels.
In Our Housing Forecast, We See More Starts, Firmer Home Prices in 2023 Brian Bernard, CFA, CPA,
Sector Director, 31 May 2023
Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders)
new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home
sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New
home sales improved sequentially during the first four months of the year, and April sales increased
11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year
over year).
We believe two factors explain the relative strength of the new home sales market. First, homebuilders
addressed affordability challenges with a combination of sales incentives (primarily mortgage rate
buydowns), base price reductions, and smaller floor plans. Second, 91% of outstanding mortgages have
a contract interest rate below 5% (according to the Federal Housing Finance Agency), which
disincentivizes existing home sales (known as the “rate lock-in effect”). As such, more would-be buyers
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are turning to the new construction market.
Considering the better-than expected spring selling season, we now expect total housing starts to
decline 17% in 2023 (to 1.295 million units), with single-family starts 18% lower (0.825 million units) and
multifamily starts down 14.5% (to 0.470 million units).
While we still expect home prices to decline in 2023, recent price resiliency caused us to moderate our
price outlook. Based on our forecast sales mix, we expect the median blended home price to decline by
3% in 2023.
Repair and remodel spending is slowing as we expected, and we continue to forecast about a 4.5%
decline in owner-occupied improvement spending this year.
We don’t expect our forecast revisions to materially change fair value estimates across our U.S.-housing
related coverage. Our long-term outlook, which sees rebounding residential construction and repair and
remodel spending beginning in 2024, remains unchanged.
Home Depot Earnings: Tough Macro Environment Weighs on Sales Momentum, but Our Long-Term
View Intact Jaime M. Katz, CFA, Senior Equity Analyst, 16 May 2023
After incorporating wide-moat Home Depot’s tepid first-quarter results and tempered 2023 guidance
(now calling for a 2%-5% decline in comparable sales and a 7%-13% drop in diluted EPS from flat and a
mid-single-digit decline, respectively), we plan to trim our $267 per share fair value estimate by a low-
single-digit percentage, in line with the market’s reaction on the print. Still, shares appear a tad
overvalued (trading at a roughly 5% premium to our existing valuation), and as such, we’d suggest
investors remain on the sidelines.
In the quarter, Home Depot’s net sales fell 4.2% to $37.8 billion, including the unfavorable weather
conditions and lumber deflation that accounted for half of the decline. A 4.8% drop in transaction count
and flat comparable average ticket indicated lackluster demand, as customers took on smaller-sized,
less-discretionary projects in response to inflationary strains and macro pressures, leading big ticket
sales (above $1,000) to decline 6.5%. Nonetheless, we view softening demand as a natural progression
toward moderating growth after lapping multiple years of pandemic-related demand. In comparison
with 2019, transaction count held flat (at 391 million) and pro backlog was higher (per management). On
a positive note, Home Depot’s operating margin degraded a mere 30 basis points (to 14.9%) in the
quarter relative to last year, which we believe is evidence of the firm’s ability to pull diverse levers to
blunt sales deleverage while continuing to invest back into its business owing to its operational agility
and extensive scale (which underpin our wide moat rating).
All in, near-term volatility doesn’t sway our long-term prognosis for the business. We believe continued
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investments (in supply chain, merchandising, product innovation, and associates) should help the firm
maintain its market leadership position, supporting our projections for low-single-digit average sales
growth and nearly 16% operating margins by 2032.
We've Lowered Our 2023 Forecasts for Residential Construction and Repair and Remodel Spending
Brian Bernard, CFA, CPA, Sector Director, 15 Mar 2023
U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made
homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage
rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the
National Association of Home Builders, this rate increase priced out more than 16 million households.
We also think higher rates and general economic uncertainty caused some qualified prospective buyers
to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over
year, respectively.
While some homebuilders have become modestly more optimistic as the spring selling season unfolds,
homebuyer optimism (as measured by Fannie Mae’s Home Purchase Sentiment Index, which was
launched in 2010) remains near index lows, and purchase mortgage application volume is more than
30% below 2019 levels.
We’ve become marginally more pessimistic on near-term single-family construction. We now project
2023 housing starts to decline 22% year over year to 1.220 million units (versus our previous 1.275
million forecast). We continue to project new- and existing-home prices to decrease 15% and 5%,
respectively, between 2022 and 2024.
Repair and remodel spending has been more resilient than residential construction, but this market
appears to us to be slowing. Most firms with significant R&R market exposure now see a market
contraction this year, with the more optimistic outlooks generally seeing a low-single-digit decline.
We’re now modeling a 4.5% decline in owner-occupied improvement spending in 2023, down from our
previous projection of about a 1% decline.
We don’t expect our forecast revisions to materially change fair value estimates across our U.S.-housing
related coverage. Our long-term outlook for rebounding residential construction and repair and remodel
spending by 2024 is unchanged.
Home Depot Invests to Defend Its Competitive Edge, Compressing Near-Term Profitability Jaime M.
Katz, CFA, Senior Equity Analyst, 21 Feb 2023
We don’t plan any material change to our $270 per share fair value estimate for wide-moat Home Depot
after considering a fourth quarter that was largely in line with our forecast and a moderating prognosis
for 2023. Fourth-quarter sales of $36 billion matched our projection, and EPS of $3.30 edged our
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forecast by three pennies. Same-store sales contracted 30 basis points, with ticket up 5.8% and
transactions down 6%, as higher prices appear to be having an impact on demand elasticity. We
surmise the ticket and transaction algorithm will normalize at a low-single-digit rate over time as
inflation moderates but that 2023 has some risk given the firm’s initial guidance for flat same-store sales
growth—a tad below our preprint growth projection of 3.5%. In our opinion, both a slowing top line and
operating margin compression (as the firm invests in the employee base) were key factors in the 5%
share decline, but we still view shares as modestly overvalued, trading at a 10% premium.
We had already modeled continued investment at Home Depot to ensure its market leadership position,
which drove our 14.7% operating margin target for 2023. This is just 20 basis points above Home
Depot’s 14.5% goal, representing an 80-basis-point decline from fiscal 2022. Most of the decline (60
basis points) stems from the announced $1 billion in investment in compensation for front line workers,
with incremental deleverage from flat sales performance partially offset by productivity initiatives. We
contend such investment is imperative to elevate the customer and employee experience, in turn
creating rising goodwill with both parties, which will support the brand intangible asset. With an
updated store team structure, new career paths that provide pay upside could help retain employees,
allowing for continuity of knowledge at the store level. Investing to perpetually improve the brand
bounds our long-term operating margin outlook at 15%-16%. K
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Competitors Price vs. Fair Value
Lowe's Companies Inc LOW
Last Close: 220.02

400 Fair Value: 213.00
29 Aug 2023 18:22, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.94 1.21 1.11 1.40 0.94 1.03 Price/Fair Value
1.29 31.90 35.91 62.78 -21.49 12.04 Total Return %
Morningstar Rating
Target Corp TGT
Fair Value: 139.00

16 Aug 2023 21:46, UTC
400
Last Close: 123.05
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.97 1.32 1.50 1.37 0.84 0.89 Price/Fair Value
4.17 97.93 39.78 32.90 -33.89 -15.25 Total Return %
Morningstar Rating
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Tractor Supply Co TSCO
Fair Value: 220.00

7 Aug 2023 21:00, UTC
200
Last Close: 212.84
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.93 0.96 1.29 1.69 1.21 0.97 Price/Fair Value
13.23 13.61 52.05 71.21 -4.17 -4.02 Total Return %
Morningstar Rating
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Morningstar Historical Summary

Financials as of 31 Jul 2023
Fiscal Year, ends 31 Jan 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 75 79 83 89 95 101 108 110 132 151 80 155
Revenue Growth % 6.2 5.4 5.5 6.4 6.9 6.7 7.2 1.9 19.9 14.4 -3.1 -0.2
EBITDA (USD Bil) 9.54 10.94 12.59 13.80 15.44 16.82 17.76 18.21 20.84 25.95 13.80 26.25
EBITDA Margin % 12.8 13.9 15.1 15.6 16.3 16.7 16.4 16.5 15.8 17.2 17.2 17.0
Operating Income (USD Bil) 7.77 9.17 10.47 11.77 13.43 14.68 15.78 15.84 18.28 23.04 12.14 23.04
Operating Margin % 10.4 11.6 12.6 13.3 14.2 14.5 14.6 14.4 13.8 15.2 15.1 14.9
Net Income (USD Bil) 4.54 5.39 6.35 7.01 7.96 8.63 11.12 11.24 12.87 16.43 8.53 16.23
Net Margin % 6.1 6.8 7.6 7.9 8.4 8.6 10.3 10.2 9.7 10.9 10.6 10.5
Diluted Shares Outstanding (Mil) 1,511 1,434 1,346 1,283 1,234 1,184 1,143 1,097 1,078 1,058 1,008 1,014
Diluted Earnings Per Share (USD) 3.00 3.76 4.71 5.46 6.45 7.29 9.73 10.25 11.94 15.53 8.46 16.02
Dividends Per Share (USD) 1.16 1.56 1.88 2.36 2.76 3.56 4.12 5.44 6.00 6.60 4.18 7.98
Valuation as of 31 Aug 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 1.5 1.8 2.0 1.8 2.3 1.9 2.2 2.3 3.0 2.1 2.0 2.2
Price/Earnings 22.3 23.9 24.8 21.7 26.3 18.8 21.7 22.9 27.7 19.0 18.9 20.6
Price/Cash Flow 15.9 18.1 18.3 16.8 19.5 16.1 17.7 14.1 29.9 24.7 19.3 17.1
Dividend Yield % 1.89 1.79 1.78 2.06 1.88 2.4 2.49 2.26 1.59 2.41 2.57 2.47
Price/Book 8.2 13.7 22.0 29.1 87.0 147.1 -222.2 185.2 416.7 250.0 833.3 250.0
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 31 Jul 2023
Fiscal Year, ends 31 Jan 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 11.1 13.2 15.8 17.1 18.7 19.7 25.1 23.6 21.1 23.1 11.2 21.3
ROE % 25.4 35.6 58.1 89.6 149 298 — — 14061 2050 589.0 2065.3
ROIC % 17.2 20.9 24.8 27.7 30.8 32.8 — — 34.2 38.2 17.9 35.6
Asset Turnover 1.8 1.9 2.1 2.2 2.2 2.3 2.4 2.3 2.2 2.1 1.0 2.0
Financial Leverage
Fiscal Year, ends 31 Jan 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 34.8 54.0 64.4 76.7 83.8 94.4 — — 92.6 — 97.3 —
Equity/Assets % 43.3 30.9 23.3 15.0 10.1 3.3 — — 4.7 — 1.7 —
Total Debt/EBITDA 1.1 1.3 1.4 1.5 1.5 1.6 — — 2.1 — 3.6 —
EBITDA/Interest Expense 15.1 15.4 15.2 15.0 15.9 15.9 16.9 15.2 15.5 19.3 14.6 14.5
Morningstar Analyst Historical/Forecast Summary as of 15 Aug 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 02-01-2023 2021 2022 2023 2024 2025
Price/Sales 2.5 2.1 2.1 2.0 2.0
Revenue (USD Mil) 151,157 157,403 153,019 156,867 163,371 Price/Earnings 20.3 17.8 21.0 19.4 17.9
Revenue Growth % 14.4 4.1 -2.8 2.5 4.2 Price/Cash Flow — — — — —
EBITDA (USD Mil) 25,902 27,014 24,460 25,716 27,109 Dividend Yield % 2.1 2.6 2.6 2.9 3.2
EBITDA Margin % 17.1 17.2 16.0 16.4 16.6 Price/Book -197.4 195.1 973.9 321.4 96.2
EV/EBITDA 16.2 13.9 15.0 14.3 13.6
Operating Income (USD Mil) 23,040 24,039 21,956 23,050 24,495
Operating Margin % 15.2 15.3 14.4 14.7 15.0
Net Income (USD Mil) 16,433 17,105 15,287 16,170 17,321
Net Margin % 10.9 10.9 10.0 10.3 10.6
Diluted Shares Outstanding (Mil) 1,058 1,025 998 978 963
Diluted Earnings Per Share(USD) 15.53 16.69 15.32 16.54 17.99
Dividends Per Share(USD) 6.60 7.60 8.36 9.19 10.11
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (24.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 23.2 risks driven by their business model
23.2
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 21.5 Low
2 0 55+ specified at the company level
Unmanageable Risk 1.7
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 21.5 ESG risks through its commitments and actions
49.2%
– Managed Risk3 10.6 Average
u Management assesses a company's efficiency on ESG
Management Gap4 10.9 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 12.6 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

12.64
Low
Negligible Low Medium High Severe ESG Risk Rating is of Sep 06, 2023. Highest Controversy Level is as of Sep 08,
2023. Sustainalytics Subindustry: Home Improvement Retail. Sustainalytics
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance provides Morningstar with company ESG ratings and metrics on a monthly
risks, by evaluating the company’s ability to manage the ESG risks it faces. basis and as such, the ratings in Morningstar may not necessarily reflect
current Sustainalytics’ scores for the company. For the most up to date rating
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by and more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 49.2% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Sep 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
The Home Depot Inc 23.2 | Low 0 55+ 49.2 | Average 100 0 12.6 | Low 0 40+
Best Buy Co Inc 27.5 | Low 0 55+ 45.9 | Average 100 0 15.9 | Low 0 40+
Lowe's Companies Inc 26.6 | Low 0 55+ 60.7 | Strong 100 0 11.8 | Low 0 40+
Target Corp 27.6 | Low 0 55+ 51.6 | Strong 100 0 14.3 | Low 0 40+
Tractor Supply Co 28.6 | Low 0 55+ 46.5 | Average 100 0 16.1 | Low 0 40+
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Appendix
Historical Morningstar Rating
The Home Depot Inc HD 15 Sep 2023 21:18, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- - - QQ QQ QQ QQ QQ QQQ QQQ QQ QQ
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Lowe's Companies Inc LOW 15 Sep 2023 21:18, UTC
- - - QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQ QQQ QQ QQ
Q Q QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ QQQ QQ QQ QQ QQ QQ QQ QQQ QQQQ QQ QQ
QQ QQ QQ QQ QQ QQQ QQQ QQQ QQ QQQ QQQ QQQ
QQQ QQQ QQQ QQ QQ QQQ QQQ QQQ QQQ QQQ QQQ QQ
Target Corp TGT 15 Sep 2023 21:18, UTC
- - - QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ
QQQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQ QQ QQ QQ
QQ Q Q Q Q Q Q Q Q Q Q Q
Q Q Q Q Q QQ QQ QQ QQ QQQ QQQ QQ
Q Q QQ QQ QQ QQ QQ QQQ QQ QQ QQQ QQQ
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Tractor Supply Co TSCO 15 Sep 2023 21:18, UTC
- - - QQQ QQQ QQQ QQQ QQQ QQ QQQ QQ QQ
QQ QQ QQ QQQ QQQ QQQ QQ QQQ QQ Q QQ QQ
Q Q Q Q Q Q Q Q Q Q Q QQ
QQ QQ QQ QQ Q QQ QQ QQ QQQ QQQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQ QQ QQQ QQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
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Research Methodology for Valuing Companies
Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
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Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
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Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
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or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
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tions, and accounting practices in the rating. associated with any part or section of a report that has
Unless otherwise provided in a separate agreement, re-
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Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a tees the accuracy of the translations.
stated otherwise, the original distributor of the report is
Morningstar company.
Morningstar Research Services LLC, a U.S.A. domiciled
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Sustainalytics’ ESG Risk Ratings measure the degree to tries and/or jurisdictions (“Territories”) by independent
which company’s economic value at risk is driven by en- third parties or independent intermediaries and/or distrib-
This report is for informational purposes only and has no
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regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This agents or representatives of the analyst, Morningstar,
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investor. Therefore, investments discussed and recom-
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Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:23, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 23

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

Price vs. Fair Value

Last Close: 321.40

300 Over Valued

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

Last Close Fair Value Fair Value

Economic Moat Wide Wide None Wide

nearly $80 billion to shareholders over the next five years.

double-digit share, leaving meaningful upside up for grabs.

improvement projects and affect Home Depot's growth.

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

(which reach 15.5% over our forecast).

Analyst Notes Archive

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

CFA, Sector Director, 14 Jun 2023

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

are turning to the new construction market.

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

Competitors Price vs. Fair Value

Lowe's Companies Inc LOW

Last Close: 220.02

300 Over Valued

Target Corp TGT

Fair Value: 139.00

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

Tractor Supply Co TSCO

Fair Value: 220.00

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

Morningstar Historical Summary

Valuation as of 31 Aug 2023

Morningstar Analyst Historical/Forecast Summary as of 15 Aug 2023

The Home Depot Inc HD QQ 15 Sep 2023 21:18, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (24.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 10.9 100 0 programs, practices, and policies

Overall Unmanaged Risk 12.6 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Lowe's Companies Inc LOW 15 Sep 2023 21:18, UTC

Target Corp TGT 15 Sep 2023 21:18, UTC

Tractor Supply Co TSCO 15 Sep 2023 21:18, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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