Responding to a Member of his Inner Circle, Pat McKeough looks at Home Depot, a leading home-improvement retailer. Home Depot has benefited from the boom in home renovations that has resulted from rising real estate values. Pat looks at whether the company can sustain its strong growth in sales and earnings in a competitive retail market. He also looks at the impact of a data breach affecting Home Depot last year, as well as the company’s share-buyback plans.
Q: Pat: What’s your view on Home Depot? Is it worth holding as part of a diversified portfolio?
A: Home Depot Inc. (symbol HD on New York; www.homedepot.com) operates warehouse-style home-improvement stores that average 104,000 square feet, plus an additional 24,000-square-foot garden centre. Each outlet typically carries 30,000 to 40,000 items.
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The company has 2,273 locations in the U.S., Canada, Mexico, Puerto Rico and Guam.
In its fiscal 2016 third quarter, which ended November 1, 2015, Home Depot’s sales rose 6.4%, to $21.8 billion from $20.5 billion a year earlier. The number of transactions rose 4.4%, while the average size of each purchase increased 0.8%, to $58.03 from $57.55.
Overall same-store sales improved 5.1%, while same-store sales at its U.S. locations gained 7.3%. Rising real estate values are prompting homeowners to spend more on renovations and other improvements. Home Depot is also benefiting from an increase in new construction: U.S. housing starts rose 6.5% in September 2015.
Total earnings rose 12.2%, to $1.7 billion from $1.5 billion, while earnings per share gained 17.4%, to $1.35 from $1.15, on fewer shares outstanding. The year-earlier quarter included a $0.01-a-share charge related to a data breach in September 2014 in which hackers stole 53 million customer email addresses and gained access to 56 million credit cards.
The company ended the quarter with cash of $3.0 billion. Its long-term debt of $17.8 billion is a low 10.4% of its market cap.
Growth stocks: Share-buyback plan backed by strong balance sheet
Home Depot’s strong balance sheet will help it buy back an additional $2 billion of its shares in the current quarter. It aims to spend a total of $7 billion on repurchases for all of fiscal 2016.
Thanks in part to these buybacks, the company expects its per-share earnings to rise about 14% for all of fiscal 2016, to $5.36. The stock has gained 37% in the past year and now trades at 24.8 times that estimate. That’s a somewhat high p/e ratio for a company that faces strong competition from discount retailers like Wal-Mart and Costco, particularly for smaller items such as cleaning supplies and light bulbs.
Still, its overall outlook is positive. The $2.36 dividend yields 1.8%.
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