Earnings Analysis: Home Depot (HD)

Remember this guy?  Yeah, I used this image to help describe what Home Depot's quarterly results were like last quarter.  And you know what?  That guy is still just screaming through the air it would seem!
Home Depot announced their first quarter 2017 results yesterday and it was a thing of beauty.  Earnings beat expectations by seven cents, coming in at $1.67 on $23.9B in sales, which also beat expectations of $23.65B.  And to add insult to injury, store comp sales were 6% in the US - crushing the analyst expectations of 3.9%.  During the call, management also explained how these numbers were also negatively impacted due to inclement weather and a later than normal Easter season.  And one final perk was provided when 2017 guidance was raised to $7.15 including the impact of share repurchases.

Strength existed throughout the store with flooring and tools being some of the strongest areas.  We also saw strong growth from the pro builder, which solidly outpaced the DIYer.  The company continues to introduce new items which continue to draw attention and while the online business has been growing furiously, they are finding that a lot of people are interested in the buy online and pick up in store options.  There is also still strong evidence that customers like to come into the showrooms to look at items before purchase and that it hasn't lead to "being Amazoned" where people look at items and then buy from Amazon instead.  That doesn't mean people won't continue to be concerned about this, but Home Depot has been doing an excellent job at managing and maximizing its supply chain (just like Amazon does).  Add in the pro customer who will be looking to pick up on demand rather than waiting for orders to be shipped directly and other initiatives to keep the demand and supply flowing smoothly, I don't believe there's a significant risk any time soon.  

Much of the strength behind this lies with the growth in household formation.  Between the improvements in the economy growing the desire for household formation and the relatively low amount of housing supply out there, people are putting more into their homes.  There is a low percentage of homes now under water and management estimates that about $5,000 per year is being put into people's homes.  This situation is also said to be making people choose between remodel and buying a new home.  This is a pleasant confirmation of my theory that the growth in Home Depot is very much about the aging home supply and people's desires to make their residence something they can be happy living and hosting in, as the current population focuses more at experience and staying home instead of going out.

While the quarter was excellent, it's also nice knowing that this wasn't even their best quarter.  They are just entering their busiest season of the year when their garden centers really draw traffic and traffic has already been excellent.  Despite the excellent guidance provided, it's important to note that I already expected management to raise their guidance a time or two this year.  As such, current guidance is still behind my target of $7.25.  I might be a little bit aggressive on my expectations, in full honesty, but this is a great start to proving my expectations realistic.  I maintain all of my current expectations, including the multiple of 22 and price target of $159.  Given how weak retail is overall, it's entirely possible people will become willing to pay up for such a high performer like Home Depot, but if that happens, I also feel the stock will become more risky to continue to hold.  For now, we stick the course and see what happens.

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.

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.