Case Study on Home Depot (HD) with Nobias technology
Home Depot reported second quarter earnings this week, beating analyst estimates on both the top and bottom-lines, bucking some of the negative trends that have plagued big-box retailers in recent months.
Richard Saintvilus, a Nobias 4-star rated author, provided investors with an earnings preview piece that he published at Nasdaq.com prior to HD’s Q2 report. Saintvilus highlighted Home Depot’s recent strength, noting that it “has been a strong Dow performer over the past two years.” He continued, “Home Depot management noted in their recent earnings call that home equity values over the last two years had increased by 40% or over $7 billion. Because of home price appreciation, the homeowner had more money to spend on home improvement projects, which is the main driver of Home Depot’s revenue.”
However, the recent changes in the domestic housing market have caused investors’ sentiment to sour on HD shares. Saintvilus wrote, “But so far in 2022 the company has been adversely impacted by soaring interest rates which have helped to slow the housing market. If that weren't bad enough, the company's gross margins have been shrinking because of higher inflation rates. Higher input costs and weakening consumer demand has caused margin erosion within this business.”
HD Aug 2022
Coming into the Q2 report, Saintvilus stated, “In the three months that ended July, the Atlanta, GA.-based company is expected to earn $4.95 per share on revenue of $43.37 billion.” He also noted, “For the full year, ending in December, earnings of $16.46 per share would rise 6% year over year from $15.53 per share, while full-year revenue of the $156.23 billion would rise 3.4% year over year.”
Saintvilus concluded his piece writing, “On Tuesday investors will want to see whether Home Depot can continue to navigate through inflationary headwinds as well has [sic] it has in the past two quarters.”
And, as it happens, the company beat Wall Street’s consensus estimates on both the top and bottom lines, posting Q2 revenue of $43.79 billion, which was up 6.5% on a year-over-year basis, and non-GAAP earnings-per-share of $5.05, beating estimates by $0.10/share.
Regarding HD’s Q2 sales trends, Michelle Chapman, a Nobias 4-star rated author, stated, “Sales at stores open at least a year, a key indicator of a retailer's health, climbed 5.8%, and 5.4% in the U.S.”
In her recent article published at Newsmax, Chapman continued, “While the number of customer transactions fell 3%, the amount shoppers spent per transaction rose 9.1%.”
Michael E. Kanell, a Nobias 4-star rated author, published a post-earnings breakdown of Home Depot this week in the Atlanta Journal-Constitution, putting a spotlight on the company’s strong results.
Kanell wrote, “Home Depot officials had worried about consumer staying power, but the robust increase in home prices meant a surge of trillions of dollars in the amount of equity held by millions of people, and that has fueled spending on repairs and renovations.” He quoted Richard McPhail, the company’s chief financial officer, who told the AJC, “In the first quarter, we were somewhat surprised by the resilience of our customers and that resilience has continued.”
Regarding HD’s recent operational strength throughout recent home price inflation, Kanell wrote, “One of the reasons home prices have climbed is the shortage of homes for sale. That shortage, made exacerbated by the pandemic, has meant fewer people moving. And when people stay put, they are much more likely to spend money on renovations and repairs — the heart of Home Depot’s business.”
Point towards a potential risk moving forward, Kanell wrote, “If there is a downturn, homeowners may do less expensive projects, and Home Depot might see tighter profit margins, said Shoggi Ezeizat, a sector analyst at Third Bridge, a global research firm.”
However, Kanell continued, “Still, unless a downturn really rattles homeowners, Home Depot should fare relatively well, he [regarding Ezeizat] said.” Kanell quoted Ezeizat who said, “The home improvement sector tends to perform well during recessions. Home Depot was built in a recession in the early ‘90s.”
In a separate article published in the Atlanta Journal-Constitution this week, Kanell touched upon Home Depot’s recent announcements regarding shareholder returns. He said, “The board of Home Depot, flush with sales and profit amid the pandemic, has approved a $15 billion buyback of its stock as a way to use “excess cash,” company officials said.”
Kanell put a spotlight on HD’s strong balance sheet, stating, “A company filing said Home Depot finished the quarter with $1.3 billion in cash on hand.” He said that Margaret Smith, a spokeswoman for the company, stated, “Our overall capital allocation principles have remained consistent for over a decade,” she said. “We invest in the business, pay our dividend and return excess cash to shareholder in the form of share repurchases.”
Gary Gambino, a Nobias 5-star rated author, covered Home Depot’s recent earnings results and provided his readers with an in-depth breakdown of the company’s current valuation in a recent article at Seeking Alpha. Gambino offered a more cautious tone on the company, writing, “Home Depot delivered average EPS growth of 19.5% in the 7 years ending in February 2020. Since then, the company enjoyed 2 years of strong growth from the pandemic stay-at-home trade. This growth has slowed considerably in the current fiscal year although current quarterly results show that the consumer is more resilient to macroeconomic concerns than expected. Still, Home Depot is maintaining its guidance of "mid-single digit" EPS growth this year. While this guidance may be conservative, future year growth looks more likely to be around 10%.”
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.
Gambino concluded his piece, stating, “With this lower growth rate, the historical P/E range of 20 - 25 is probably too high going forward. Home Depot remains a great company but at $327 it is still worth about 20 times this year's estimated earnings. The stock traded around $270 in June which is a more reasonable 16.5 times earnings for a stalwart 10% grower. I would not tell anyone to sell here, but those looking to start a new position should consider waiting for a pullback to that level.”
Overall, however, the credible authors and analysts that Nobias tracks express a bullish sentiment for HD shares. 65% of recent articles published by credible authors about HD have included a “Bullish” bias. Right now, 7 out of the 8 credible Wall Street analysts that Nobias tracks who offer an opinion about HD shares believe that the stock is primed to head higher.
The average price target from these 8 individuals for HD is currently $350. Today, HD trades for $300. At this price point, HD shares are down by more than 25% on a year-to-date basis. And, looking at the credible analyst average price target, which implies upside potential of approximately 12%, it appears that the stock has more upside ahead.
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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