Thursday, May 29, 2014

Stock Analysis: Home Depot (HD)

Last Tuesday, Home Depot announced their first quarter earnings report and essentially blew the cover off of the ball.  Earnings came in at $0.96, which was in-line to slightly below estimates and revenues were slightly lower as well.  All of this was directly related to a very late spring in as much as a third of the chain's retail regions.  Frank Blake and his team reiterated a number of times that these sales would be deferred to the second quarter and to back that claim up, they're already seeing very "robust" sales in May to back those claims.  Additionally, to add fuel to the positive fire, Guidance was raised to $4.42 for the year.  Growth was seen throughout the store, especially in the Kitchen and Bath areas.  Flooring was improving, but impacted by carpeting which tends to do better in warmer weather.  2 signs of continued encouragement is the increase in professional consumer sales as well as a continued increase in average ticket price.

The numbers released put everyone on edge initially and I recall the stock futures being down before the conference call began.  That all changed very quickly as the call started and management immediately addressed the concerns of the causes of the lower numbers, pointing to weather and the sale of HD Supply's impacts on the year over year comparisons.  They commented on how the warmer regions performed not only as they expected, but better than expected and that the colder climate areas that were behind schedule were just getting going.  They also pointed out that this is exactly how things went last year when we had a late spring in the northern regions as well.  Though you can't hear the analysis on the call, you could still almost hear some tension about future prospects and concerns to if growth was slowing and the housing market was losing steam.  Again, management continued to build it's case, provide data about hosing numbers, their metrics and modeling and how things are doing just as well if not better than they've planned.  Just before the Q&A session, the CFO talked again about how sales were going in the month of May.  This time the word "robust" was used.  As the questions started, you could hear the excitement to the analysts.  Questions around the word "robust" started flooding in.  Frank was asked why housing slowed and he gave a very solid, logical answer stating that rates went up too much too fast.  All the pieces were falling into place.  The following day, Lowe's reported their quarter and it was clear that Lowe's wasn't taking share and all is happy with the world.  This, in a nutshell really was the quarter.  Another example of flawless UPOD delivery, increased guidance in the first quarter already, and despite difficult seasonal challenges, they were still able to deliver.  

My Stock Ownership Plans:
Bottom line, you gotta hold on to this stock.  Interest rates are going down and that means it's likely we'll see more home purchases in the coming months.  This is a best of breed performer, growing earnings at over a 20% clip and the stock is priced at 18 times the given guideline of $4.42 earnings for the year.  I anticipate there will be another guidance increase later in the year and my personal estimate is currently at $4.50.  Since the quarterly announcement, the stock has been on the rise.  I don't think it's pulling back anytime soon, but at the same time this isn't the price point to pay for the stock when it just had a run.  For this, I give the stock a ranking of 2.  I know in at least 1 previous posting I got overly eager and gave a $100 price target.  This is way too aggressive for 2014.  The stock is best of breed, it has growth trends and signals in its favor, and isn't too expensive given its growth, but it's not super cheap and it will have tougher compares later in the year.  The company also has a strong buyback plan in place, so this can help both earnings and stock price (1.4B shares outstanding), and the yield is starting to have some appeal as the 10-year treasuries are nearing the same spot.  All of these factors make a $90 price target feel like a solid stretch-goal for the year. Down side risks are rising mortgage rates and slowing sales for any reason.  Any other event that makes home repair fall out of favor would also be a significant risk.  So far, these seem to be very unlikely considerations.