Home Depot Hacked - 44 Civil Lawsuits Filed

by Ryan Fitzwater, Director of Research, The Oxford Club
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Today Home Depot (NYSE: HD) announced it is facing 44 civil lawsuits in the U.S. and Canada related to a widespread data breach that took place earlier this year.

In September, the home improvement retailer revealed a massive month-long data breach that started in April and led to 56 million credit card accounts and 53 million customer emails being stolen.

According to the company’s investigation, hackers accessed Home Depots network through a third party vendor’s username and password.

The Fallout

Home Depot has already warned investors that probes and claims “may adversely affect how we operate our business, divert the attention of management from the operation of the business and result in additional costs and fines.” And it has already felt the impact.

In the most recent quarter, Home Depot saw a $28 million pretax expense hit the books due to the data breach. With 44 civil suit filed against the company, more pain is on the way.

You might recall that similar hacker tactics were used to infiltrate Target (NYSE: TGT) last year. In that breach, more than 40 million payment cards and information about 70 million customers were compromised. Target recently noted that the breach has already cost the company over $148 million and counting.

Home Depot stated it is too early to estimate the potential financial hit it may take from the lawsuits. We will have to wait and see how it shakes out.

But considering Home Depot’s data breach had 16 million more credit cards being compromised compared to Target’s hack, $150 million in future expenses is a worthy ballpark figure for now.

The good news is that Home Depot took out a $100 million insurance policy for data breach expenses last year. The policy will help cover some legal and fraud expenses, but not everything under the sun will be covered.

As you can see in the chart, despite the data breach, Home Depot’s stock has performed well compared to its peers so far this year.

But further probes, lawsuits and related cybersecurity costs will eat into earnings over the next few quarters and could negatively affect the stock price. This is something investors should be concerned about.

With Home Depot is sitting on over $2.18 billion in cash, expenses in the $150 million area might seem like a minor blip on the radar. But with more than $16.7 billion in debt on its balance sheet, the entire picture is far from rosy.

Let’s get a better understanding of Home Depot’s financial footing with our Investment U Fundamental Factor Test. With no idea how big of an impact lawsuits will have on share prices, we can at least gauge the company’s current situation.

Earnings-per-Share (EPS) Growth: Despite data breach costs already hitting the books, in the most recent quarter Home Depot saw EPS jump 20.83%. Off to a good start.

Price-to-Earnings (P/E) Ratio: Home Depot’s P/E of 22.89 is barely above the industry average of 22.61. If we look at forward P/E (a blend of the past two quarters of earnings and the projected earnings for the next two quarters), things look a bit pricier. Its forward P/E of 19.37 is over a point and a half higher than the industry of 17.84. Safe to say it misses on this metric.

Debt-to-Equity I already mentioned a large amount of debt on Home Depot’s balance sheet - $16.7 billion to be exact. With a debt-to-equity ratio of 165.45%, compared to its peers that are averaging 42.88%, Home Depot is definitely more overleveraged than we would like to see.

Free Cash Flow per Share Growth : And free cash flow is also dwindling. In the most recent quarter free cash flow dropped 49.91%. That won’t help them pay the legal bills.

Profit Margins Home Depot turns things around here. Its profit margins of 7.49% are above the industry’s 5.16% average.

 Return on Equity And Home Depot finishes out our last metric with a bang. It’s getting a 49.16% return on equity for shareholders, while the industry is averaging just 18.14%.

As you can see, we have an even split on metrics here. This gives Home Depot a “Hold” rating based on our Fundamental Factor Test. Remember, this rating doesn’t take into account future expenses that could rise due to the continued fallout from April’s data breach. Current investors should tread water with caution.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

C: Hold (Hits just three key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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