Stock Analysis: Home Depot (HD)

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.

This morning, Home Depot announced what I can't help but feel was an outstanding quarter.  Earnings blew away the $0.89 estimates, coming in at $1.05 - $1 if you include profits from the sale of a portion of HD Supply.  Revenues also beat the $18.69B estimates, coming in at $19.2B.  Same store sales rose an astounding 7.9% for the fourth quarter.  Looking at the full year, the company earned $4.71 which was over a 25% increase from 2013.  Revenues grew 5.5% from 2013 to $83.2B and same store sales were up 5.3%.  Sales were strong across the entire store all comping a minimum of mid single-digit percentage increases from last year.  Also, as expected, the company announced an increased dividend, raising it 26%.  They also surprised me by including a new share buyback program of $18B between now and 2017.  The buyback amount for 2015 is expected to be $4.5B, compared to the $1.5B they had remaining from their previous buyback program.  The one spot to be aware of is that comp numbers from last year might have been considered an easy compare.  If you recall, last year was hit with numerous snow storms and polar vortexes which resulted in large numbers of people staying in, delaying some sales until the first quarter of 2014.  While this is true, the numbers were still higher than the company has ever seen for a fourth quarter.  It is a worth note that shouldn't be overlooked, though.

Looking into fiscal year 2016 (mostly calendar year 2015), HD management has provided guidance of $5.11 to $5.17.  These numbers take into consideration the $4.5B share buyback they expect to do in the year.  These numbers also show an anticipated foreign exchange impact (Canada and Mexico stores) of about 6 cents per share.  The forex impact is just a matter of the situation and doesn't face the volatility we see in some of the other more global companies I have in my portfolio.  It poses the risk to get worse and is something to watch.  That being said, I also want to note that these estimates are based on an estimated same store sales growth of 3.3 to 4.7%.  When compared to this year, this has the potential of being a fairly conservative estimate.  I honestly believe the company can do 5% same store sales and hit $5.20 earnings.  Risks to this estimate would include increase in interest rates and/or other socioeconomic impacts that would make consumers decide to reign in spending and improvement on their homes.  

From my point of view, I am guiding to $5.20 earnings for FY 2016.  I think providing a multiple of 25 is relatively fair for the company that has a 5 year history of growing earnings at a 22% clip.  The thing to keep in mind is the fact that the trend appears to be accelerating growth.  If this trend continues, my price targets could remain at a PEG raito of 1 - 1.2.  Owning stocks in this PEG ratio range is typically considered cheap for a growth stock and the ratio could get much closer to 2 without being considered "too hot to hold."  I'm staying conservative for now, but don't see why we can't hold the stock all the way up to a ratio of 1.5 or more safely.  The stock might sound/seem expensive compared to S&P 500 multiples, but if we're in a strong growth market, people will pay more for that 20%+ growth.  Based upon my multiple, I have my price target set at $130 and am leveraging that as a reason to check my euphoric emotions to assure there aren't risks afoot.  There's nothing stopping the stock from getting up to $150 providing this growth trend continues and numbers keep getting met/beat, though.