Earnings Analysis: Home Depot (HD)
Yesterday, Home Depot announced the results from its second quarter operations. If you look back at my previous 2 quarterly reports (here and here), you'll notice how I used the screaming baseball video to describe the results of those quarters. I figured I'll spare you from that again, but that ball is clearly still screaming - in fact it might be accelerating it's trip through space. That's how strong the results from the quarter were. They reported sales of $28.1B, which resulted in a beat of last years sales by 6.2% and beat estimates by $300M. Earnings also topped expectations of $2.21, coming in at $2.25 - a 14.2% increase from the same quarter a year ago. Same store sales also blew away expectations, which were expected to be in the high 4% to low 5% area, with results of 6.2% and the US had 6.6% same store comps. So results were exceptionally impressive.
Next up, management pushed guidance up again for the second quarter in a row and this guide up was no small jump. Sales guidance was increased from 4.6% to 5.3% for the year and comp store sales were guided up from 4.6% to 5.5%. Earnings estimates surged to $7.29 from $7.15, much more than anyone anticipated, including share buybacks - oh and those increased from $5B this year to $7B. In essence, Home Depot management is not only ecstatic about its results and future prospects, but they're certain they'll hit these numbers despite some of the turmoil in the news recently.
Speaking of that turmoil, let's look at that. If you bother to listen to the conference call, that turmoil is pretty much all we heard about. Amazon, Amazon, e-retail, and appliances in e-commerce. This all stems from the recent announcement of Sears' Kenmore brands partnering with Amazon. There is a lot of fear that a company previously considered Amazon proof is now going to fall at its knees. This fear clearly was the impact of the over $4 drop in stock price yesterday, though it did recover nicely today. It's clear from management's response they are aware of the competition, but are confident in what they've been standing up to serve their customers as "One Home Depot." This isn't just a bricks & mortar store any more. They have an online face, they ship to your home, ship to store, you can order online and have someone collect your items and pick them at the store a few hours later, they deliver in either 2 or 4 hour windows for pros. They're focused on having what customers want at the right places at the right times and clearly it's been very successful so far.
But then there's people that will talk about the company's valuation. That it's long in the tooth and all this good fortune has to end sometime soon, doesn't it? When will this cycle break? CFO Carol Tome is all over the cycle. I have tons of respect for this woman and her knowledge of the market, her customers, and her competitors. This market is currently only getting stronger. Housing market is tight, more homes are getting built, home values are climbing, more millenials are buying homes than ever to start their family ("of whatever type" as Carol said in the call) and there is so much stock of homes older than 30 years and older than 2000 that you expect to see more and more remodeling work too. So no, there isn't an end to this yet. Is valuation steep? Maybe a little at best. You look at the retail sector and there are few, if anyone that can put up these kinds of numbers. Most people are falling to the beast known as Amazon. Here you have a retailer that's in front of the beast, well connected to their customer, and is working with a growing economy that it needs and a stay at home culture that encourages people to invest in their homes. I won't go so far as to say that Amazon, or e-tailers in general, may not cause some pricing pressures in some areas. That said, I just don't see significant impact from them at this time. They're already competing against other companies in-store and online. Every time I try my hardest to find reasons why this stock should get hit hard, I struggle to find it - and believe me, this is a stock I focus on hard to make sure I'm not suffering from recency or selection bias. I have great gains and I don't want lose them.
With the additional share repurchases, the company's guidance has surpassed my own healthy estimates of $7.25 for the company. Can the company maintain the 22 multiple it has owned? I'm a little more skeptical there. I see too much fear out there to say people will continue to pay that multiple and when you look at the market more broadly, I anticipate some multiple contraction longer term. As such, I will lower my multiple to 20, but keep in mind that the 22 multiple is still achievable in the shorter term. As such, $7.29 earnings for 2017 would put us at about $146. I estimate 2018 earnings somewhat conservatively at $8.10 (approximately 11% earnings growth from 2017 estimates). That puts my 2018 price target at $162, but note at a 22 multiple that price can go as high as $178. I reiterate my stock rating of a 2 at these price levels.
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.
Next up, management pushed guidance up again for the second quarter in a row and this guide up was no small jump. Sales guidance was increased from 4.6% to 5.3% for the year and comp store sales were guided up from 4.6% to 5.5%. Earnings estimates surged to $7.29 from $7.15, much more than anyone anticipated, including share buybacks - oh and those increased from $5B this year to $7B. In essence, Home Depot management is not only ecstatic about its results and future prospects, but they're certain they'll hit these numbers despite some of the turmoil in the news recently.
Speaking of that turmoil, let's look at that. If you bother to listen to the conference call, that turmoil is pretty much all we heard about. Amazon, Amazon, e-retail, and appliances in e-commerce. This all stems from the recent announcement of Sears' Kenmore brands partnering with Amazon. There is a lot of fear that a company previously considered Amazon proof is now going to fall at its knees. This fear clearly was the impact of the over $4 drop in stock price yesterday, though it did recover nicely today. It's clear from management's response they are aware of the competition, but are confident in what they've been standing up to serve their customers as "One Home Depot." This isn't just a bricks & mortar store any more. They have an online face, they ship to your home, ship to store, you can order online and have someone collect your items and pick them at the store a few hours later, they deliver in either 2 or 4 hour windows for pros. They're focused on having what customers want at the right places at the right times and clearly it's been very successful so far.
But then there's people that will talk about the company's valuation. That it's long in the tooth and all this good fortune has to end sometime soon, doesn't it? When will this cycle break? CFO Carol Tome is all over the cycle. I have tons of respect for this woman and her knowledge of the market, her customers, and her competitors. This market is currently only getting stronger. Housing market is tight, more homes are getting built, home values are climbing, more millenials are buying homes than ever to start their family ("of whatever type" as Carol said in the call) and there is so much stock of homes older than 30 years and older than 2000 that you expect to see more and more remodeling work too. So no, there isn't an end to this yet. Is valuation steep? Maybe a little at best. You look at the retail sector and there are few, if anyone that can put up these kinds of numbers. Most people are falling to the beast known as Amazon. Here you have a retailer that's in front of the beast, well connected to their customer, and is working with a growing economy that it needs and a stay at home culture that encourages people to invest in their homes. I won't go so far as to say that Amazon, or e-tailers in general, may not cause some pricing pressures in some areas. That said, I just don't see significant impact from them at this time. They're already competing against other companies in-store and online. Every time I try my hardest to find reasons why this stock should get hit hard, I struggle to find it - and believe me, this is a stock I focus on hard to make sure I'm not suffering from recency or selection bias. I have great gains and I don't want lose them.
With the additional share repurchases, the company's guidance has surpassed my own healthy estimates of $7.25 for the company. Can the company maintain the 22 multiple it has owned? I'm a little more skeptical there. I see too much fear out there to say people will continue to pay that multiple and when you look at the market more broadly, I anticipate some multiple contraction longer term. As such, I will lower my multiple to 20, but keep in mind that the 22 multiple is still achievable in the shorter term. As such, $7.29 earnings for 2017 would put us at about $146. I estimate 2018 earnings somewhat conservatively at $8.10 (approximately 11% earnings growth from 2017 estimates). That puts my 2018 price target at $162, but note at a 22 multiple that price can go as high as $178. I reiterate my stock rating of a 2 at these price levels.
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.
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.
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