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Good Economy, Strong Housing Market Power Home Depot

Stock (Symbol)

Home Depot (HD)

Stock Price

$165

Sector
Retail & Travel
Data is as of
October 10, 2017
Expected to Report
Nov 14
Company Description
homedepot_manhattanThe 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
David SharekPositive housing data is providing a tailwind for Home Depot’s (HD) business. The company is being driven by strength in Pro and do-it-yourself customers, with lumber, electrical, tools and flooring growing double-digits last qtr. Building materials like pipes, power tools and wire were in demand as was flooring, storage, and patio. Big ticket sales (those above $900) increased 12%. Home Depot is focused helping Pros manage their business. The company just acquired Compact Power Equipment, a leading provider of equipment rental. Another growth engine is online sales, which rose 23% last qtr, and now account for 6% of total sales. Low interest rates and increasing home prices are causing people to spend money on their homes. But what makes Home Depot stock special is the company does so much with such little store growth. This is a mature chain, which doesn’t really grow its store base much (they went from 2274 to 2278 stores last year) but management is sound in improving SSS as well as spending its hoards of profits on stock buybacks & dividends. Management has a target payout of 55% of profits going to dividends (which have increased every year since 1998) with the rest to stock buybacks. Last year the company bought back around 4% of shares, and just upped its buyback plan for this year from $5 billion to $7 billion. Home Depot is taking mid single-digit sales growth and getting mid-teens profit growth out of it — with all the growth last qtr coming from same store sales. But long-term I assume Amazon will chip away at the appliance business. This stock is safe, reasonably priced, and comes with an Estimated Long-Term Growth Rate of 13% per year in addition to a juicy 2% yield. At 21x earnings the stock is reasonably priced, and is a core holding for conservative growth investors.
One Year Chart
Last qtr HD delivered another solid qtr with 14% profit growth and beat estimates of 12%. Both sales and same store sales increased 6%. Annual profit estimates for 2017, 2018 and 2019 increased for the 3rd straight qtr. Qtrly profit growth Estimates call for 13%, 11%, 11% and 12% profit growth the next 4 qtrs, and HD has beaten the street the last 4 qtrs.
Fair Value
This stock is up 10% since last qtr, and that zapped a lot out of the upside out of the stock. But on the other hand the stock’s now in a clear uptrend (see the one-year chart above) and it’s better to have momentum than it is potential. Not that 16% in a year would be bad.
Bottom Line
Home Depot is rising a strong housing market higher. And with GDP growth of 3%, the outlook for the next year is bright. People are buying homes and remodeling them, and with house prices rising this is proving to be a wise investment.  This company is a juggernaut, delivering mid-teens profit growth off of just 5% sales growth, and has provided investors with a safe stock that’s grown 15% a year during the last decade. HD ranks 9th in the Conservative Portfolio Power Rankings and 31st the Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

31 of 35

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

9 of 33

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