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
Home Depot is a home improvement retail chain located in North America (Canada, US, and Mexico). It provides products to both retail customers as well as pros (contractors), which provides full spectrum of the people who need home building and remodeling, as well as landscaping products. The stock had been surging the last couple years due to it's ability to consistently increase comparable sales numbers and the improving housing market. As the market continues to improve, I foresee Home Depot's stock to continue to perform well. At this point, it has created a market leader brand, taking share from competitors and creating demand that didn't exist by paying attention to what their customers want and delivering on it while still improving margins.
Home Depot's stock rose last year by 33.13%, beating the S&P500 which returned 29.69%. It did under perform the retail sector, which returned 44.64% (based on the XRT ETF fund). 2013 was a strong year for general retailers - especially clothiers, whereas HD really had its jump start in 2012. On a 2-year picture, Home Depot is outperforming the XRT, to provide some perspective. Speaking of performance, 2014 has been a bad start for Home Depot's stock as well as all of retail overall. The stock for HD dropped 9.2% starting in January and it wasn't until the start of February that it started to rebound. There are multiple factors for this. First, people were taking profits on winners in January after such a strong 2013. Secondly, retailers started reporting numbers from the Holiday season and for their fourth quarters and the results weren't good. Many companies from Wal-Mart, to Best Buy to various clothiers were well below expectations due to the shorter quarter, online shopping, and weather impacts. These resulted in people expecting a bad quarter from Home Depot, which reported today and surprised with earnings beats, though sales were down slightly - mostly due to the extra week of sales that 2012 had. All comps were up, which is impressive considering how much weather has impacted store traffic. I live in Minnesota. I don't know about anyone else suffering from this cold and snow, but I know I'm not out shopping much and I'm darn-sure not going to do any projects that require opening the doors to outside frequently! This, combined with improved pro sales and continued home price improvements have the company positive for strong spring sales in 2014.
One big risk that faces us this year is rising interest prices. In the later portion of 2013, we saw interest rate pressures start to stall home prices and activities. Though Home Depot gets sales from both home building and home remodeling, interest rates still provide risk that spending on home improvement could be deterred. Comparing sales against the results of 2013 will also make for tougher signs of improvement. All that being said, The Home Depot's management still estimates a jump in earnings of over 16%. Even with the price jump today after the earnings announcement, the P/E ratio for HD is still at 18x next year's earnings. With growth rates this strong, this is actually a rather cheap price, given the overall market. PEG ratio is only at 1.2 for a company that is a market leader and continues to appear to take share from its competitors. Personally, I believe HD will have another strong year, but there are some more risks out there than there has been. I'm giving the stock a rating of a 2 and a $100 price target. I will openly admit that I currently see this as a somewhat lofty goal and it could easily become revised, should economic indicators dictate reason to readjust. From a technical's perspective, this stock broke through the 200 day moving average today and after this report, I expect that to be a floor of support for now. It also bounced off of the 50 day moving average - again providing a floor of support. The 10 day average crossed over the 20 day average which helps show a change in the short-term trends. All in all, the trends look promising and I sense that a 5-10% pull back isn't likely except if we get more bad housing numbers or if primary competitor Lowe's (LOW) reports a weak fourth quarter that results in selling pressure in the home improvement sector. Today Home Depot is 10.6% of my portfolio which essentially means my core position is in place. If I buy any additional shares, it would be because either I had a cash infusion to the portfolio or we had a pullback and I decided to add a position to use to trade around my core with the gyrations of the market.
In all, The Home Depot had yet another solid year both for the company and the stock. 2014 is setting up to be a solid year despite some difficult weather impacts to start the year and as long as the housing market and overall economy continues to slowly warm up, I expect Home Depot to continue to do well. Just keep an eye on those interest rates and how that impacts housing overall to ward off potential downside risk.