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.

On Tuesday, Home Depot announced their second quarter results for 2014.  When I spoke of this in my weekly summary, I was mixed with both fear of the results we've been seeing from the industry crossed with anticipation and excitement from a management team that has been proven and announced a previous quarter with signs of "robust" sales.  I was feeling cautious, like I should sell at least some of my position, but I was steadfast with management instead, knowing I'd learn a valuable lesson from this experience.  Today I announce that lesson to be this "When you look for stocks, find reliable, strong, confident, and capable leadership teams that are attached to those stocks.  It can make a huge difference in results."  I back this statement up with not only these results, but also the results of two other stocks I hold - Honeywell and Pepsico.  In each case, strong managements have resulted in strong results.  

Now down to the facts.  Earnings came in at $1.52 on $23.8 Billion in sales.  That's a seven cent beat on estimates for earnings and well above the revenue estimates as well.  On top of that, they also raised guidance on the year from $4.42 to $4.52, which is two cents above my expectations.  This means that earnings are growing at a 20% clip, which well exceeds pretty much anyone's expectations.  The quarter itself was incredible.  Sales were strong in all categories, with the shift in seasonal products being about a 1.5% addition to what was expected.  Same store sales were up 5.8% compared to last year and this doesn't take into account that there was a half percentage point taken away due to rising dollar value.  I've tried to find risks or negatives in the numbers that were provided, but I just can't seem to find them.  In fact, it appears they're also taking market share as their transactions and ticket sales increased more than key competitor Lowe's.  

Looking forward, the rest of 2014 looks strong.  They still expect expansion in same store sales growth, they've increased earnings guidance, and have reaffirmed their sales guidance.  The models they use to provide these figures appears to be in line with what they've expected the entire time, though household formations are slower than they'd care for.  Additionally, a day after announcements, they announced that Craig Menear will become the new CEO of Home Depot on November 1.  This is not a surprise to people as it's been expected for some time.  Frank Blake will continue to be the chairman of the board.  While this will be a change, I expect it to be a relatively smooth one as Mr. Menear has been with Home Depot for many years and has been closely involved with developing the company's current performance over the last few years.  

Stock Ownership Plans:
Thankfully I held this stock and watched it pop almost 10% since the earnings call.  The stock is currently priced at 20 times earnings with a growth rate of 20 times as well.  Essentially this makes the stock cheap on 2014 earnings.  I'm raising my expectations of 2014 earnings to $4.55.  This is again higher than the guidance, but I believe there's good reason for it as the executive team tends to be conservative and provide numbers they're all but certain they can hit.  I'm also going to estimate earnings growth of 15% for 2015.  This is slower than 2014, but I don't feel comfortable predicting they will continue to grow earnings at a 20% clip.  As such, I estimate 2015 earnings at $5.23, which places the stock at 17 times 2015 earnings.  With as much as the stock has run up, I don't recommend buying at these levels, however, I would consider a buy recommendation for those that would be costing down when the stock reaches the $85 to $87 range.  As such, I rank the stock a 2.  At it's current price, Home Depot has a peg ratio of 1.  The industry average is 1.3 and this company has been growing earnings faster than the industry average over the last 1 and 5 years.  This is clearly a premium stock that I believe growth buyers will be willing to pay up for.  As such, I don't think paying 25 times 2014 earnings is currently out of the question.  And this is how I'll price my stock for now.  With my estimate, I will round my price target down to $110 to help provide a level of conservatism.