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Not a Home for Investors

August 19, 2014 | About:

Home Depot (HD) beat earnings estimates, resulting in a 6% increase in the company's stock price. We can't take away from the strong performance HD had, but this doesn't mean the stock is still being overvalued. HD has been increasing its dividend consistently since 1990, and is currently at a 2% dividend yield. Increasing dividends is always a good indicator for a company, but it doesn't always mean a company is a good buy at its current price levels.

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HD has $14 billion in long-term debt, which isn't always bad. The trouble companies can get into with long-term debt occurs when they aren't generating enough cash to cover debt payments and are forced to increase their borrowing rather than use the cash they are generating to support their operations. HD's long-term debt did increase significantly from $9 billion last year, which could raise some red flags.

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Priced at 10 times book value, and at almost 20 times their free cash flow generating ability, HD is still overvalued even though it has had a very strong quarter across the board. Analysts are considering HD as a bellwether for how well the economy is doing and an indicator of a housing market recovery. I'll continue to be a patron of HD, but I wouldn't make it a home for my hard-earned money.

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