Stock Analysis: Home Depot (HD)
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Last week, Home Depot announced their fiscal first quarter results. First Quarter Sales came in at $20.9B and earnings of $1.21 ($1.16 excluding items) - both beat estimates of $20.82B and $1.15 respectively. Additionally, same store sales came increased 6.1% with US stores increasing 7.1%. Essentially, this was yet another solid beat by the company who credited a 30% increase in online sales as a strong reason for such strong growth in the quarter.
In addition to the solid results, the company has already raised 2015 guidance rather significantly from their original range of $5.11 - $5.17 to $5.24 - $5.27 now. This change in estimates already surpassed my advanced expectations of the company. They also raised their estimates for same store sales to go from 3.3% - 4.7% to the 4.2% - 4.7% range. I still feel they could hit the 5% mark, though that may be a stretch. Additionally, key competitor Lowe's announced their results the following day last week and results were disappointing compared to estimates - showing that Home Depot appears to be taking an increased share of sales. Execution continues to exceed even management's expectations and trends are all heading the right direction. The customer base appears to be people who have "more valuable homes ($200,000+) and those homes have been regaining value faster than lower value homes. This could be a reason for the growth patterns seen compared to competitors.
During the call, analysts tried to find holes in the report and forecast. I don't feel they had a lot of luck, though. Credit is easing, though extremely slowly, and that could curtail acceleration, but if that thawing advances, it could just mean more business for HD. When asked about impacts from increases in interest rates, they said that the valuation index is strong and an increase in rates means there's a little inflation, which is also good for their company. Finally, it was asked that since we're in a "normal spring" this year, if some of the normal 2nd quarter sales were pushed into the first quarter instead. Simply put, on a "normal year," HD has evidence that very little changes in their overall sales and revenues as a percentage of business compared to an "abnormal year."
All of these facts and figures provide a strong case for my theory that home remodeling, building, and redecorating will continue to drive performance from this segment of the market and that Home Depot is a key way to capitalize on all kinds of housing related growth. While there is risk, the trends in home price appreciation and household formation are starting to improve, with an anticipated 1 Million households being formed this year. But CFO Carol Tomé probably put the greatest spin on the potential that excites the company right now:
In regards to the stock itself, it sold off after both the strong results and Lowe's miss. This is a little surprising to me, however, it's been staying well above it's recent lows within the last couple months as well. The changes in the guidance has taken my previous estimates to the wood shed. As such, I raise my guidance to $5.30. This is three cents higher than the guidance they've provided, indicating I wouldn't be surprised if they raised guidance again this year, similar to how they did last year. This guides as a 12% earnings increase from last year as well. As such, I'm lowering my multiple to fit more in line with current earnings growth expectations, but want to note that the company has been showing 20% or more growth for 5 years. I'm going to give a multiple of about 24.5 and maintain my $130 price target. Unless the overall market takes off, I don't expect to see that target until 2016, but do see $120 as a legitimate price to be seen in 2015.
In addition to the solid results, the company has already raised 2015 guidance rather significantly from their original range of $5.11 - $5.17 to $5.24 - $5.27 now. This change in estimates already surpassed my advanced expectations of the company. They also raised their estimates for same store sales to go from 3.3% - 4.7% to the 4.2% - 4.7% range. I still feel they could hit the 5% mark, though that may be a stretch. Additionally, key competitor Lowe's announced their results the following day last week and results were disappointing compared to estimates - showing that Home Depot appears to be taking an increased share of sales. Execution continues to exceed even management's expectations and trends are all heading the right direction. The customer base appears to be people who have "more valuable homes ($200,000+) and those homes have been regaining value faster than lower value homes. This could be a reason for the growth patterns seen compared to competitors.
During the call, analysts tried to find holes in the report and forecast. I don't feel they had a lot of luck, though. Credit is easing, though extremely slowly, and that could curtail acceleration, but if that thawing advances, it could just mean more business for HD. When asked about impacts from increases in interest rates, they said that the valuation index is strong and an increase in rates means there's a little inflation, which is also good for their company. Finally, it was asked that since we're in a "normal spring" this year, if some of the normal 2nd quarter sales were pushed into the first quarter instead. Simply put, on a "normal year," HD has evidence that very little changes in their overall sales and revenues as a percentage of business compared to an "abnormal year."
All of these facts and figures provide a strong case for my theory that home remodeling, building, and redecorating will continue to drive performance from this segment of the market and that Home Depot is a key way to capitalize on all kinds of housing related growth. While there is risk, the trends in home price appreciation and household formation are starting to improve, with an anticipated 1 Million households being formed this year. But CFO Carol Tomé probably put the greatest spin on the potential that excites the company right now:
If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents. And if they were all to leave their home nest, like my nephew just did, thank goodness, that's 4 million households that would be created. So I'm just really excited about what the future may be for our business.This shows just how much potential is laying out there. I think it's safe to say that millenials are a little bit of a different bunch and won't necessarily go and buy/build homes all the time, but they won't continue to live in their parents' basements either. Things can get worse, but it's important to see the potential that's here too.
In regards to the stock itself, it sold off after both the strong results and Lowe's miss. This is a little surprising to me, however, it's been staying well above it's recent lows within the last couple months as well. The changes in the guidance has taken my previous estimates to the wood shed. As such, I raise my guidance to $5.30. This is three cents higher than the guidance they've provided, indicating I wouldn't be surprised if they raised guidance again this year, similar to how they did last year. This guides as a 12% earnings increase from last year as well. As such, I'm lowering my multiple to fit more in line with current earnings growth expectations, but want to note that the company has been showing 20% or more growth for 5 years. I'm going to give a multiple of about 24.5 and maintain my $130 price target. Unless the overall market takes off, I don't expect to see that target until 2016, but do see $120 as a legitimate price to be seen in 2015.
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