Stock (Symbol)

Home Depot (HD)

Stock Price

$131

Sector

Retail & Travel

Data is as of

July 8, 2016

Expected to Report

Aug 16

Company Description

The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sell an assortment of building materials, home improvement products and lawn and garden products and provide services. The Home Depot stores average approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. The Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. As of December 31, 2014, the Company had 2,269 The Home Depot stores, which included 1,977 stores in the United States, including the Commonwealth of Puerto Rico and the territories of the United States Virgin Islands and Guam; 181 stores in Canada, and 111 stores in Mexico. Source: Thomson Financial

Sharek’s Take

Slowing housing figures might lead to weakness in Home Depot (HD). Although housing starts were up 7% for the first half of 2016, they were down 2% during the month of June — with building permits down 14% during the month year-over-year. These negative economic figures might foretell weaker sales for Home Depot 6-9 months from now. Still, management is positive on its prospects going forward. The company posted solid 7% same store sales growth last qtr and management sees close to 5% SSS for the fiscal year. Home Depot has successfully transitioned from a retailer which expanded by opening new stores to one which gets more out of each store. For the year the company is expected to have 17% profit growth on just 7% sales growth. Management has a target payout of 50% of profits going to dividends (which have increases every year since 1998) with the rest to shareholders through big stock buybacks. HD yields 2% and analysts have an estimated long-term growth rate of 14% on the stock, for an estimated total return of 16% per year. Home Depot’s numbers look solid. Profits have grown an average of 19% a qtr the past 4 qtrs and analyst estimate between 12% and 16% the next 4 qtrs. This safe stock sells for 21x earnings, which is below my Fair Value of 23x. Right now everything is sunny with this stock, but there are clouds on the horizon.

One Year Chart

Profit growth was a solid 24% last qtr on just a 9% increase in sales. Analysts estimated 15% profit growth and the company blew past that mark. Profit estimates for this year got upped due to the beat, but analysts didn’t raise qtrly estimates much. Looking ahead, profit estimates for the next 4 qtrs are 15%, 16%, 14% and 12%. These seem more in line with what the company could produce going forward with the recent weakness in housing/building permits.

Fair Value

My Fair Value on this stock is 23x earnings, but this might get reduced last qtr if I continue to see warning signs in the housing market. Still, the stock is trending higher with the market in a strong rally. The trend is our friend and since the trend of the stock and the stock market is up I feel its best to ride the wave.

Bottom Line

Home Depot looks solid despite the negative headwinds that might be on the horizon. This stock has a high safety rating, a good dividend and a solid 14% estimates long-term growth rate. With the stock market in an uptrend now, I feel this is a good selection for the next few months. But after that the future is more cloudy as building might slow. HD moves down from 3rd to 5th in the Conservative Portfolio Power Rankings. It ranks 14th in both the Growth Portfolio and Aggressive Growth Portfolio Power Rankings.