Home Depot: Can Home Depot Continue Its Double Digit Growth into 2021?
Home Depot has been on a tear as of late, due to the strength of the housing market, the stay-at-home economy, and what some believe to the secular trends forming in terms of younger generations embracing the “do-it-yourself” mindset. 2020 was a banner year for the company, with full-year sales rising 19.9%, diluted earnings-per-share increasing by 16.5%, and same-store sales metrics showing comparable sales figures up 20.6%.
Demitri Kalogeropoulos touched upon HD’s tremendous 2020 in a recent article, where he highlighted an interesting quote from HD’s CEO, Craig Meaner during the company’s Q4 earnings conference call, "It took us 19 years as a company to achieve the first $20 billion in total sales, and we outgrew that in this year alone.”
However, now investors must ask themselves, will this success continue into the future? Looking forward to 2021, Richard Saintvilus, a Nobias ranked 5-star analyst, recently summed up the stock’s situation headed into earning first quarter quite well, saying, “Home Depot stock responded favorably, soaring 22% year to date, more than doubling the 9% rise in the S&P 500 index. Its shares have enjoyed a strong run over the past six months, rising more than 17% compared to the 14% rise in the S&P 500 index. But can the housing market Home Depot has benefited from, which has also sent the real estate sector to its fastest price growth in more than a decade, remain resilient?”
He went on to say that the market was expecting to see the retail giant post revenues of $34.61 billion and earnings-per-share of $3.03, which implies strong growth, on a year-over-year basis, compared to the $27.54 billion and the $2.08/share earnings figure that Home Depot posted during the first quarter one year ago.
It’s clear that HD shares have been riding a multi-faceted wave, created by the combination of the work-from-home trend created by the COVID-19 pandemic and low interest rates resulting in a very strong housing market as renters who were previously forced to live in expensive urban areas now begin to think about home ownership outside of the city limits.
Coming into Q1, there was little doubt that the confluence of bullish trends in the housing market would result in strong growth for Home Depot’s fundamentals. However, as Saintvilus said, “The concern is whether all that growth has been pulled forward, meaning the pandemic-driven revenue has already been spent?”
Well, as it turns out, the company didn’t lose its luster during Q1. Martin Baccardax, a Nobias 4-star analyst posted an article breaking down the results in the Toronto Star last week, saying, “Home Depot (HD) posted stronger-than-expected first quarter earnings Tuesday amid what the world’s biggest home retailer called “unprecedented” demand for domestic projects.”
Baccardax continued saying, “Home Depot said earnings for the three months ending on May 2, the company’s fiscal first quarter, were pegged at $3.86 per share, up 85.6 per cent from the same period last year and well ahead of the Street consensus forecast of $3.06 per share.”
With regard to sales, Baccardax said, “Group revenues, Home Depot said, rose 32.9 per cent to $37.5 billion, again topping analysts’ estimates of a $34.61 (U.S.) billion tally.” And, in terms of the comparable sales metric, the company beat expectations as well.
Baccardax said, “Same store sales were up 31.1 per cent from last year, Home Depot said, firmly ahead of the Refinitiv forecast of 19.9 per cent, while comparable sales in the U.S. were up 29.9 per cent, with both figures coming in well ahead of Street forecasts.”
Brian Withers, another 5-star ranked analyst by the Nobias algorithm recently had bullish things to say about HD after this expectation shattering report. Withers broke down his bull thesis into 3 primary segments. First of all, he mentioned that the company has paid a reliably increasing dividend and the HD is currently on an 11-year annual dividend increase streak. Over the years, Home Depot has been very generous to its shareholders when it comes to both its dividend and buyback.
The company’s 5 and 10-year dividend growth rates come in at 20.5% and 20%, respectively. In other words, this company’s historical dividend growth has meant that long-term investors have doubled their passive income every 3.5 years or so. What’s more, the company is equally, if not more generous when it comes to return cash to shareholders via share repurchases. During the last 5 years alone, HD management has used share buybacks to reduce the company’s outstanding share count by more than 14%. And, on May 20th, the company announced that its board of directors had approved a $20 billion buyback authorization, which represents roughly 5.9% of the company’s current $339.6 billion market cap.
Withers isn’t the only analyst who’s bullish on Home Depot’s dividend. Taking a step further back, Leo Nelissen, a Nobias rated 4-star analyst who publishes work on Seeking Alpha, recently penned a piece in which he called Home Depot “one of his favorite dividend growth stocks” and said, “Between the year ending January 30, 2005, and January 31, 2021, the company has raised dividends from $0.36 to $6.15. This implies a CAGR of 18.2%. The good news is that the average growth rate of the past 5 years is ABOVE that number, which implies that growth hasn't been fading as most companies report a significant slowdown in dividend growth over the past few years.”
He went on to say, “In the most recent fiscal year (2020), the company hiked dividends by 10%. Going forward, I expect the average to remain in the 10-12% area.” And, regarding buybacks, Nelissen wrote, “Using the same time period (2005-2021), the company has reduced shares outstanding from 2.2 billion to 1.1 billion. This translates to a CAGR of -4.15%.”
Second, Withers says that while this may look like a rather boring, traditional, big box retailer, “But behind the scenes, it is investing in tech like crazy. We talked a little bit about the omni-channel -- that's complex from a tech perspective, especially with legacy infrastructure that was built in the late '80s, early '90s.” And lastly, he also mentions the stay/work-from home trend and the wide-scale desire amongst consumers to get the most out of their living spaces, which continues to point towards renovation projects.
Wither’s comments were made during a podcast with his fellow analyst, Jason Hall. In response to Wither’s points, Hall responded saying that he believes it’s worth mentioning that “[The] average existing home in the U.S. is 37 years old. That's old, right? That means a lot of them were also built in the late '70s and early '80s when homebuilders were building really crappy homes. Home Depot also has great relationships with local contractors. I think a lot of people sleep on that. I think it's a huge source of potential growth because of those things Brian was talking about.” Jason Hall is a Nobias 3-star analyst, though he too is bullish on HD shares. And, these two gentlemen aren’t the only two analysts bullish on the company.
Chris Katje, a Nobias 4-star analyst who writes for Bezinga, penned a post-earnings article where he highlighted the Wall Street response related to Home Depot’s results. Katje said, “Raymond James analyst Bobby Griffin reiterated an Outperform rating and a price target of $350. RBC analyst Scot Ciccarelli reiterated an Outperform rating and raised the price target from $377 to $386. Morgan Stanley analyst Simeon Guitman reiterated an Overweight rating and raised the price target from $340 to $345. Telsey Advisory Group analyst Joseph Feldman reiterated an Outperform rating and a price target of $370.” Katje noted a key takeaway from HD’s report was that “Thirteen of Home Depot’s of 14 product categories posted gains of 20% year-over-year or more.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Katje highlighted the risk moving ahead, saying, “Gutman says the second quarter could be a key to watch for Home Depot with tough comparable sales. The analyst sees comps coming flat in the second quarter or up in the lower single-digit range.” However, he also mentioned that Joseph Feldman’s recent note said, “Home Depot commented that in the first two weeks of May the two-year stacked comp was running over 30%, implying a comp up at least MSD vs. 24.6% in May last year,” which points towards continued growth into the second quarter.
Although HD’s performance in the past has been wonderful, it’s important to remember that share price performance moving forward is based upon the company’s ability to generate cash strong flows in the months/years ahead.
At this point, it’s unclear as to whether or not the company will be able to continue its double digit growth momentum throughout the entirety of 2021 or not; however, the analyst consensus earnings estimate for earnings-per-share during the full-year in 2021 is currently $14.00, which would represent 17% year-over-year growth if management is able to meet expectations.
This 17% growth estimate, on top of 2020’s 16% growth is the reason why so many analysts remain bullish on HD shares. Right now, when looking at the recent opinions expressed by 4 and 5-star rated Nobias analysts, we see that there are 32 “Buy” opinions, 1 “Neutral” opinion, and 28 “Sell” opinions.
So, all in all, the analyst community appears to be torn on whether or not the trends that Home Depot has benefitted from during the last year or so will prove to be isolated or more secular. However, in terms of the professional Wall Street analysts that Nobias tracks, the average price target provided for HD shares is $329.60, and given the HD’s current share price is $315.77, this implies that the company may have more upside momentum left in the tank.
Disclosure: Nicholas Ward is long HD. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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