Stock (Symbol)

Home Depot (HD)

Stock Price

$124

Sector

Retail & Travel

Data is as of

January 10, 2016

Expected to Report

Feb 23

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

Home Depot (HD) opened its first 2 stores in June 1979, then went public in 1981. In its 1st annual report (1982) it states sales increased 131% and profits 168% the prior year (buy!). Profits then declined in 1985 (a bad investment in Boward Home Centers) then climbed to all time highs in 1986 and the stock then blew to record highs as the P/E was just 18 or so. HD closed 1986 forty cents a share (after splits). Today the stock is higher, but still growing strong. Profits rose 23% last qtr on just a 6% increase in sales. HD grew online sales 25%, and same store sales 5%, with U.S. locations up 7%. SSS is am important number as its easy to grow profits by selling more goods without increasing rent or labor. Also, management bought back $7 billion in stock last year, and with its market cap is $151 billion that’s 5% of shares (which can increase profits 5% alone). The company has paid a dividend since it 1982 and the yield is 2%. So you have solid SSS increases, big stock buyback, nice income. Analysts estimate HD can grow 14% long-term, add the 2% dividend and hypothetically that’s a 16% annual returns. Home Depot gets a top safety rating of 1 from Value line, sells for a reasonable 20x earnings, and is a solid holding in the Conservative Growth Portfolio.

One Year Chart

HD has had a good year. Profit growth was super the last 4 qtrs, and estimates show a solid 10%, 16%, 16% and 15% growth coming the next 4 qtrs. In my last report I thought HD was high as the P/E was 23. Now the stock is reasonable here at 20x earnings. Annual Earnings estimates have also been increasing, so the health of the business is strong.

Fair Value

I feel HD is worth 21x earnings, which gives it a Fair Value of $130 this year and $148 in 2017. With the stock market in a correction, this is a good quality stock to collect on a dip.

Bottom Line

HD did have some down years during the 2008-2009 recession, but that was during a time of oversupply in housing. Todays factors are better. Still, the stock grew 12% a year during the decade (plus a dividend yield of 2%).

Home Depot is one of the best retail stocks to own, and could deliver investors long-term mid-teens returns with a high degree of safety. Management is smart — executing superbly right now — and has the company growing strong. HD ranks 10th of 34 stocks in the Conservative Portfolio Power Rankings. I will consider the stock for the Growth Portfolio if the price gets better.