Earnings 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.

Home Depot announced third quarter earnings results for 2016 on November 15.  Sales came in at $23.3B, resulting in earnings of $1.60.  This beat the consensus of $23.09 in sales and earnings of $1.58.  Comparable sales were up 5.5% overall and 5.9% in the US.  Finally, they also delivered forward guidance which kept sales growth targets in line with previous communications and raised earnings per share estimates for 2016 to $6.33 which would be a 15.9% growth from 2016.  Keep in mind that this means the dividend is likely increasing as well, since Home Depot usually returns half of the earnings in dividends the next year (3.16 for 2016 should be the guideline now).  It's important to recognize that earnings growth is being impacted by share repurchases, but guidance of 6.3% sales growth is nothing to slouch at.

Transactions increased 2.4% while average ticket increased 3.1%, this is an indication to just how strong Home Depot's strength is still, while you saw all departments showing positive comps.  Finally, big ticket sales (over $900) were up 11.3%.  This represented 20% of US sales.  Home building and remodeling appear to continue to be strong, despite what we saw from suppliers Masco, Whirlpool, and Sherwin Williams within the last 6 weeks.  Another announcement that was made was the acquisition of long term debt that they will use to repurchase shares, totaling up to $7B in share buybacks for 2016.  There has been $4.6B in repurchases to date, meaning we could see around 17.5M more shares repurchased by the end of the year.  

In short, it's hard to understand why this was seen as anything but a dynamite quarter - especially after hearing how competitor Lowe's didn't do so well.  The company has an incredible pulse on the customer and I trust their management team in both their ability to provide customers with what they want - executed in a manner that's exceptionally well performed - and be able to adjust and be up front when things change.  They see a strong 2017 in front of them and I don't see why I should doubt it at this time - even with rising interest rates.  The stock has just recently gotten back above where it was when it announced the results and these results give me little choice but to increase my targets across the board.  2016 earnings will be $6.34, Conservative 2017 earnings will be $7.10.  Given current views, I think the consumer will feel stronger and I think the markets will respond favorably to retail stocks despite some interest rate hikes, so I'll give a 22 multiple on the stock that is going to grow over 15% this year and I provided a 12% EPS growth guidance for next year.  This leaves a 2017 price target of $156.  I see down side risk to $124 at this time.  Given the risk/reward ratio, I believe it's proper to upgrade the stock to a 1 at these prices.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.