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 delivered yet another set of solid quarterly results.  Second quarter earnings slightly exceeded expectations of $1.73 on sales of $24.8B.  Same store sales results also beat expectations, coming in at 4.2%.  While the 4.2% is lower than the over 7% result we saw last quarter, the compares were much more complex as well.  Additionally, earnings guidance for the year was increased rather significantly to a range of $5.31 to $5.36.  This is a 13% - 14% increase from last year's results.  Sales were also bumped up to a growth rate of 5.2% - 6% from 2014.  This revision is a combination of both performance seen from the first half of the year with expectations on the second half as well as an extra cent added in from the expected accretion from their recent acquisition.  These estimates, again, surpass my own expectations set for the second quarter in a row.  Should the US economy in the housing space stay as strong as it is, I'd be hard pressed not to believe we'll see another raise during the third quarter call, unless a strong US Dollar keeps pressure on the results.

Looking at the results for the quarter, there's a lot of strength.  Strength was seen across the entire store, though there was a lot of strength in big ticket items such as appliances, water heaters, windows, and riding mowers.  The pro customers also showed strength, indicating that the housing market is strong with repairs and remodeling.  Average home prices have appreciated 4% this year and people are feeling like their homes are investments rather than expenses again.  Household formations are also strong, providing reason to believe there will be continued strength over the coming quarters.  Rising interest rates are a headwind, but they haven't had much impact so far and since the rates have been racing downwards lately, they're not likely to remain a headwind for the short term at least.  Many commodity costs are also crashing, which should indicate an increase in margins over time as well.  Areas of risk include some rising costs, primarily due to rising wages, a return to increasing interest rates, and the impacts of a strengthening US dollar.  I think it's also important to call out that the earnings growth rate is expected to be 13%-14% and that does not include the impact of the stock repurchases which will total $7B this year.  This is below the 20% growth rates I had been talking to in the past and brings a bit of a mea-culpa.

Research indicates the 5 year projected annual growth rate is a little over 14%, which is in line with current projections.  The guidance is also almost a 17% increase from last years results when including gained earnings due to less shares.  I think it's fair to estimate that earnings will grow at a 18% clip this year despite the FX impacts.  This puts my new price target at $5.40.  This may be a little aggressive, finally, should FX continue to be an impact on earnings.  Should my expectations get surpassed again in the third quarter, we're right back to my 20% growth guidance.  With earnings at 18 times, I believe the company can still earn a multiple of 22, which would put my price target closer to $120, however, I also looking out to 2016 and see continued growth and strength.  As such, I'm going to maintain my $130 price target, but expect this to be more of a 2016 target than a 2015 one.  

The stock itself surged after the announcements, but the subsequent market crushing has made the stock retreat to prices below where it was when they announced earnings.  I would not be surprised to see the stock pull back to the $110 mark if we continue to see this pressure in the market.  People are scared right now and not willing to pay high multiples for stocks.  I feel this will be temporary once we pull back to prices where the risks are priced in.  A stock like HD isn't really in the line of fire for the negative risks being worried about right now unless the US suddenly went into a recession.  While it would be stupid of me to rule this possibility out, I don't feel it to be extremely likely right now either.  As such, the stock is still ranked a 2.  Let it pull in to good prices due to an irrational market and then be ready to pounce.