Stock (Symbol)

Home Depot (HD)

Stock Price

$126

Sector

Retail & Travel

Data is as of

February 29, 2016

Expected to Report

May 17

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) seems to have a magic formula for growing profits. The company has successfully transitioned from a retailer which expanded by opening new stores to one which gets more out of each store. The company ended the qtr with 2274 stores, up just 5 from 2269 a year ago, yet profits grew 17% as savvy management increased sales per sq ft (which helped boost same-store sales 7%). HD has a target payout of 50% of profits going to dividends with the rest to shareholders through stock buybacks. The stock yields 2% and analysts have an estimated long-term growth rate of 14% on the stock, for an estimated total return of perhaps 16% per year. The stock earns Value Line’s highest safety rating of 1 and has increased its dividend every year since 1998. Home Depot has been growing profits through a blend of getting more sales per store and buying back orange buckets worth of stock. Analysts estimate HD can grow 14% long-term, add the 2% dividend and hypothetically that’s a 16% annual return. Profit estimates for the next 4 qtrs are 15%, 15%, 15% and 13% as analysts predict steady mid-teens growth. The P/E is reasonable at 21 considering the safety rating. HD is part of the Conservative Growth Portfolio, and I will add the stock to the Growth Portfolio.

One Year Chart

HD continues to put out solid results. Last qtr the company made a profit of $1.17, beating the street by 7 cents, and paid out $0.59 in dividends. Sales increased 10% on a 7% same store sales increase. It’s like management has found the magic formula for growing profits.

Fair Value

I feel HD is worth 23x earnings, which gives it a Fair Value of $141 this year, 12% above the current price. My 2017 estimate calls for a total return of 31% by 2017 if the numbers come out as projected here.

Bottom Line

Home Depot has found a magic formula to be able to grow profits even after its saturated the American landscape. The stock has a high safety rating and could deliver investors long-term mid-teens returns in addition to a growing dividend. HD ranks 4th of 35 stocks in the Conservative Portfolio Power Rankings. I will add it to the Growth Portfolio if where it will rank 25th of 40 stocks in the Power Rankings.