Earnings 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.

Yesterday, Home Depot reported their 2016 second quarter earnings results, repeating yet another quarter of stellar performance.  Earnings came in at $1.97 on $26.5B in sales, mostly in line with respective estimates of $26.48B.  While it might not seem so impressive that the numbers were in line with expectations, there are a few important things to note.  First, same store sales came in at 4.7%, 5.4% in the US, which is still exceptionally impressive growth in a retail area that's been struggling.  Second, the company also increased their earnings guidance for 2016 from $6.27 to $6.31 to represent 15% earnings growth year over year (with help from $5B worth of share repurchases), fourth these earnings estimates represented a 13.9% growth rate despite not adding new stores, and finally competitor Lowes reported numbers today that completely missed expectations - resulting in same store sales growth of only 2% and growing earnings at 9.2%.  This helps illustrate the dominance that Home Depot continues to show in its execution.

Looking at the details it's really hard to find a lot to complain about.  All categories were up, ticket totals were up, transactions were up, big ticket items were up, and both DIY and Pro categories were up.  The housing backdrop of low rates, rising home values and a consumer willing to spend on their home keeps a strong tailwind to their progress.  That said, if you do want to work to find things to be concerned about, you can note that the amounts that these items are growing at is starting to happen at a decelerating pace.  We do risk analysts getting ahead of the business and expecting perfection when weather or other factors could creep in and create a less than optimal quarter.  That said, when earnings are growing like they are and same store sales are this strong in a very weak sector, it's kind of hard to consider the stock over priced at 21.5 times this year's guided earnings.  Factor in only 10% growth from that number for 2017 and now the stock is only priced at 19.5 times 2017 earnings.  While I will say you're starting to push the upper bounds, I don't think you're at unreasonable prices at this time.

When looking at things, I have to raise my own guidance up on this stock.  I'm actually thinking the company can beat their current estimates and hit $6.34 on the year.  When earnings are growing at 16% clip, even if it is assisted by share repurchases (hey, what else are they going to do with all the extra cash?) I don't see any reason why a 22 multiple on earnings is out of the question.  That leaves 2016 price targets at $139.50.  Factor in an estimated 10% growth of earnings (I'm low balling here), and you're looking at 2017 earnings target of $6.97 which at that same 22 multiple puts you at a price target of $152.50.  Essentially, I believe this stock is capable of reaching $150, given current conditions.  As rates rise and homes stop appreciating in value, I think there's a runway in front of us.  We have to keep an eye on things as we could start seeing a slowdown, but right now both management and I don't see that happening until 2018 at the earliest.
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