Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Home Depot (HD) trade with gains of up to 6% during Tuesday's trading session. The home improvement retailer reported strong sales for the final quarter of 2012. The company furthermore announced a very favorable capital allocation strategy to its shareholders.

Fourth Quarter Results

Home Depot generated fourth quarter revenues of $18.2 billion, up 13.9% on the year before. The fact that the quarter consisted out of 14 weeks, instead of 13 weeks, added $1.2 billion in sales. Excluding the additional week, revenues were up by 6.3%. Revenues were driven by a very strong 7.0% increase in comparable store sales.

The company reported a $1.0 billion profit for the final quarter, or $0.68 per share. This compares to earnings of $774 million, or $0.50 per share in the final quarter of 2011. The extra week added $0.07 in earnings for the quarter.

CEO and Chairman Frank Blake commented on the results, "We ended the year with a strong performance as our business benefited from a continued recovery in the housing market coupled with sales related to repairs in the areas impacted by Hurricane Sandy. I'd like to thank our associates for their hard work and dedication."

Outlook

Home Depot also issued the full year outlook for its fiscal 2013. The company expects to generate total sales growth of 2%, despite the fact that this year will have one week less compared to 2012. Growth is driven by a 3% expected increase in comparable store sales as well as 9 new store openings.

The company hopes to increase operating margins by approximately 65 basis points. Combined with planned share repurchases, earnings are expected to increase by approximately 12% to $3.37 per share.

Capital Allocation

On top of reporting a strong end to 2012, Home Depot pleased its shareholders by returning more cash. Its board of directors approved a 34% increase in its quarterly dividend, to $0.39 per share.

The board furthermore authorized a $17 billion share repurchase program which replaces the current authorization. At these levels, Home Depot could repurchase roughly a quarter of a billion shares, or a sixth of its share base currently outstanding.

Valuation

Home Depot ended its fiscal year of 2012 with $2.5 billion in cash and equivalents. The company operates with $10.8 billion in short and long term debt, for a net debt position of $8.3 billion.

The company reported full year revenues of $74.8 billion for 2012 on which the firm earned $4.5 billion.

Factoring in Tuesday's gains, the market values Home Depot around $101 billion. This values the firm at 1.3 times annual revenues and 22-23 times annual earnings.

As a result of the dividend hike to $0.39 per quarter, Home Depot currently pays a dividend yield of 2.3%.

Some Historical Perspective

Shares of Home Depot have risen by more than 40% over the past year. Shares traded around $50 in the first half of 2012, and have steadily gained ground, approaching all time highs, around $68 at the moment.

Shares have more than tripled from lows around $20 during the recession in 2008, as the weak housing market put pressure on the prospects of home improvement retailers.

Between 2008 and 2012, Home Depot has reported a very modest cumulative revenue growth of just 5%. The company has driven returns by doubling its annual profits over the same time period. Earnings per share rose even faster as the company has retired roughly 10% of its shares outstanding over the time period.

Some Historical Perspective

At the presentation of the third quarter results, I took a look at the prospects for Home Depot. I concluded that the company was perfectly positioned to benefit from the rebound in the housing sector. With shares trading around $63 at that moment, I concluded to remain on the sidelines given the high valuation.

It is interesting that Home Depot deserves a premium valuation in today's environment. Shares are trading at least 50% higher from the highs in the low forties set during the housing bubble in 2006-2007. The main reason for the higher valuation seems to be the increase in margins and earnings, not revenue growth.

Despite the margin expansion, shares are valued at a premium valuation of 22 times 2012's annual earnings, and 20 times 2013's expected earnings. While a 39% dividend hike seems impressive, it "only" boosted the current dividend yield to 2.3%. At these levels I see few triggers to pick up some shares given the historically high profit margins and the high overall valuation multiples.

I applaud management with the value creation over the past years on the back of operating margin expansion and a sound financial strategy. Yet I see few reasons to pick up shares at these elevated levels despite the strong results and the shareholder-friendly financial strategy.

Source: Home Depot - Good News Show Sends Shares To All Time Highs