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.

On February 21 (yeah, I know I'm way late), Home Depot announced fourth quarter and fiscal year results for 2016.  Instead of using words to describe how the quarter went, I thought I'd just leave this:

That baseball is essentially sell side analysts and their estimates for the quarter and the year - completely spanked, thought that can also be said about the guidance provided by Home Depot's management.  To get more specific, Home Depot reported sales of $22.2B and earnings of $1.44.  This was against expectations of $21.73B and $1.33 respectively.  Not only this, but same store comps were up 5.8% and 6.3% in the US.  Ladies and gentlemen, I think it's important to remind you that this is against difficult compares of a year ago!  On the year, comps were 5.6%, which is 60 basis points above what was estimated for the year.  Clearly, sales and earnings all topped management guidance as well.  

But wait!  There's more!  Because of the success and progress the company has made, additional moves have been made regarding their capital strategies.  Instead of setting their dividend payment to 50% of the previous year's earnings, they're raising it to 55%, meaning a 29% increase in dividend payout from a year ago.  They also replaced their previous share buyback program with a $15B program - a third which expected to be purchased during the course of 2017.  This is a rough estimate of about 2.5% of total shares outstanding.

Finally we have guidance.  Management provided guidance of sales and same store sales comp growth of 4.6%.  They also targeted a 10.5% increase in earnings, setting their target to $7.13.  They intend to open six new stores, which will have a negative impact on gross margin as well as I suspect the operating margin increase of 30 basis points is lower than if they didn't open new stores.  The new store openings is something to be careful of.  The retail sector, as a whole, is suffering from a condition of too many stores and their online services cannibalizing them.  We don't want to see Home Depot fall into the same problem or it's game over for the stock.  With the Fed expected to raise rates again this next week, I suspect there will be more chatter regarding how higher interest rates will hurt anything related to the homes, but I trust the CFO way too much to believe that stuff.  It's too early and there is a strong social penchant for improving the home for selling, or staying in - since people aren't going out as much right now.  Eventually rates will have an impact, but I don't see that any time soon.  While the retail sector is hurting, Home Depot is shining.  This is likely to make the stock even more sought after, but you do need to be careful of the stock getting ahead of itself.

I'm used to this management team being conservative and I don't find this time to be anything different.  You can pretty much guarantee they'll hit these numbers if things don't go well.  On top of that, they are also expecting a tax rate over 36%.  If that changes due to tax reform, that could be a huge windfall too.  I expect same store comps will be more around 5% and earnings increase will be closer to 13%.  As such, I'm increasing my 2017 earnings estimate to $7.25 and setting a price target at $159.  Just note that this price target requires a multiple of almost two times the earnings growth rate, so if we see any weakness it will take longer to hit that target.

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