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.

Earlier this week, Home Deopt delivered what can only be called an incredible quarter.  The company had sales of $21.8B which turned into earnings of $1.35 per share.  This beat EPS Estimates of $1.32 on revenues of $21.76B on a quarter that was expected to have harder compares.  Additionally, the key metric for retail - same store sales - was up 5.1% while the US same store sale results were up 7.3%.  These numbers are nothing to slouch at.  The home improvement segment of retail is clearly strong, whereas clothing and other retail appears to be suffering mightily.  

With the third quarter's results in, they have also provided guidance for 2015.  Sales are expected to grow 5.9% for the year with a 4.9% same store sales growth projection.  Add to this a EPS growth projection of 14% and they end up at an EPS estimate of $5.36 for the year.  When it comes to annual projections, the company tends to be conservative.  With them at the point where they're projecting only 1 quarter, I feel things are likely to be on par with what they're estimating.  On December 8, they'll be hosting an investor conference call.  From what I've gathered in the call today, we'll hear more about expectations for 2016, and ongoing plans to keep the customer coming back to their stores.  Comments were also made that while HELOC loans were down this year, banks are looking to ease restrictions.  

The entire call I was looking for spots where things could go wrong - what are the risks?  It bothers me to say this, but I'm really struggling to find out what it is.  The big concern on the call was weather.  The last 2 years, we had rough winters and that slowed/delayed purchases as everyone went into hibernation mode.  This year, we have a strong El Niño taking place.  This, typically means warmer, drier weather which should indicate that more outdoor work will occur this year, but it also means that the south and southwest is cooler and wetter - good for drought-ridden California, but a potential impact to activity in the region.  Over my last few years of owning HD stock, I've come to learn that the weather will play with the short-term action of the stock.  We might see a hit to share price as people overreact to impacts on weather, however, over the course of the year, you will find that performance will stay on par, providing execution stays consistent.  Another risk I see is interest rate hikes.  Again, I expect this to hit stock prices when it happens, but it's been said in the past that for awhile, at least, this actually helps sales.  There's still a huge population of millenials living with their parents, household formation is still down and is likely to recover more than it has so far.  It was also mentioned today that there is an aging house population out there that typically requires increased spending in repairs.  It's possible that this could also lift the ongoing need for things that Home Depot provides.  It's tough to figure out what, exactly, might make people slow down spending at these stores and fixing up their homes right now.  While there's an element to that which feels great, it's also something, as an investor, to stay vigilant and skeptical on.  

Looking ahead and looking at the stock itself, we know that Home Depot is likely to hit the $5.36 target they guided to this quarter.  Earnings are growing at a 14% rate and is taking share in their sector.  I've been giving the company a multiple of 24 and will maintain that level for now.  I've set what I thought was a lofty goal for a price target of $130 and holy shit, we hit it by the close of Friday's trading (insert shocked face emoji here).  We have also entered a period of time where the market has a very strong history of staying in the green for the remainder of the calendar year.  Over the last 5 years, only 1 time has their stock gone down in this period of time.  No real indicator of this year, but it does have a favorable trend to work with.  Truthfully, the stock has jumped so far above the 200 day SMA that I wouldn't be surprised to see it pull back to $125 or so.  So there's certainly short-term risk here.  Long-term technicals indicate there's room to run, but that doesn't count against a pullback.  With the year in check and my price target hit, I need to project my thoughts towards 2016.  I don't see a lot of reason to lower my multiple at this point.  Maybe we go through some multiple contraction when rates rise and we go from 24 times down to about 20 times - if the growth rate stays at 14%.  I'm going to guess 15% EPS growth for next year, which puts my 2016 EPS projection at $6.16.  Taking into account my multiple, my 2016 price target is now at $148.  Though it's important to note that if multiples do contract to 20, the price target goes down to $123.  At current prices, I consider this stock to be a 2.  The Fed meeting and investor conference in December will be things to watch as they could have an impact on these estimates.