Home Depot Is a Buy as Results Trounce Estimates
Terrific quarterly results, a 17% dividend hike and $5 billion stock buyback should further lift shares.
By
JOHANNA BENNETT
February 23, 2016
Home Depot blew the roof off analyst estimates.
The home improvement retail giant, whose warehouse-style big box stores are scattered across suburban America, postedstronger-than-expected fiscal fourth-quarter profit growthearly Tuesday as overall same-store sales rose a whopping 7.1%. U.S. same-store sales surged 8.9%.
Per-share earnings rose to $1.17 from $1.05, and revenue climbed 9.5% to almost $21 billion. Wall Street expected per-share profit of $1.10 and $20.39 billion in sales.
Home Depot (ticker:HD) also offered a bullish forecast for 2016. And the company raised its quarterly dividend by 17% to 69 cents a share. The stock, which yields 1.9%, would yield 2.2% if applying the higher dividend. Home Depot also announced a $5 billion stock buyback program.
At a recent $124.88, Home Depot is up a mere 1.6%, offering investors an excellent buying opportunity.
Home Depot has pulled back 8% since hitting a record high $135.47 in late November, due largely to the broader market selloff. Yet the environment that ledBarron’sto recommend Home Depot in a cover storylast year remains intact. In short, while U.S. consumers have been unwilling to spend on new clothes at Macy’s (M)and Nordstrom (JWN), they have been spending on home improvement projects. So, Home Depot remains well poised to cash in on a strengthening U.S. housing market.
Home Depot expects to earn between $6.12 a share and $6.18 a share during the current fiscal year on revenue of $93.01 billion to $93.81 billion. That brackets the $6.16 a share on revenue of $93.12 billion expected by the Street, offering potential upside. Home Depot’s full-year financial forecasts came with a warning label about a strong U.S. dollar possibly pressuring results this year.
Home Depot, which exceeded expectations several times last year, trades at 20 times forward earnings, a slight premium to the stock’s historical average. But what justifies Home Depot’s premium valuation is the engine driving that better-than-expected profit growth.
According to Credit Suisse analyst Seth Sigman, Home Depot’s growth stems largely from strong comparable-store sales, specifically transaction growth fueled by sales of appliances and other big ticket items. Stock buybacks help, too.
Home Depot sees same-store sales climbing as much as 4.5% this year, on the heels of the 5.6% increase posted last year.
Data released today showed a modest increase insales of previously owned homesin January. With most existing homes in the U.S. built at least 30 years ago, there are a lot of fixer-uppers in need of fancy bathroom fixtures, energy efficient windows and new hot water heaters.
Of course, Home Depot remains vulnerable to concerns about broader economic growth. And having grown accustomed to earnings outperformance, investors won’t likely take kindly to, heaven forbid, an in-line quarter.
Still, with the housing market strengthening, “the foundation seems solid for 2016,” says Credit Suisse’s Sigman. We agree, and expect shares to reach new highs this year.