Home Depot (HD) reports its fiscal Q1 '14 earnings before the bell on Tuesday morning, May 21st, with analyst consensus expecting $0.76 in earnings per share (EPS) on $18.68 billion in revenues for expected year-over-year growth of 17% and 6% respectively. Both annual and quarterly revenue and EPS estimates continue to tick higher.
HD's stock rose 47% in calendar 2012 and is up another 22% year-to-date in 2013 (excluding the dividend) with the monster returns being driven by sharp recovery in housing off the 2008 financial crisis-induced housing depression. There were a number of different headlines we could have given today's preview, and one was the phenomenal job management has done generating earnings growth from little to no store growth in the last 5 years.
Since January 2008, HD has added a total of about 20 new stores, which is really nothing in terms of 5-year store growth, and "trailing 4-quarter revenues" have been essentially flat over that same time period. However, earnings growth since January 2008, is up about 35% (cumulative) all of it driven by operating margin gains from reduced store expenses, and better cash flow from lower capex.
HD's operating margin has risen from 7% in January 2008 to 9.6% as of January 2013, as total operating expenses have fallen from 27.21% to 25.30% over the same period. While this might not sound like much in terms of savings, when annual revenues are between $71 and $75 billion for the same period, the percentage savings become very real.
Home Depot's Annual Metrics and Store Count Since 2008
|Fiscal yr||Rev's||GM||Op Mgn||Op exp||EPS|
|1/14 (est)||$77 bl||$3.51|
Source: internal spreadsheet, Thomson Reuters estimate data and earnings reports, 10-Q's, 10-K's
* GM = Gross margin
As the reader can quickly see, HD quickly got handle on its operating expenses beginning in calendar 2010, and drove operating expenses down as a percentage of revenues from 2010 forward. Thus without adding stores or adding substantial revenue growth, productivity savings and productivity gains around expenses allowed HD to drive annual EPS growth of about 7% per year over a 5-year period, when the housing industry was in contraction.
Return of big-ticket:
The most compelling metric the last few quarters has been big-ticket comps, which is a very profitable business for HD. From our earnings notes, here is how big-ticket comps have trended the last 4 quarters:
- Jan '13:+9%
- Oct '12:+4%
- Jul '12:+3.4%
- Apr '12: +6.7%
Big-ticket comps are sales greater than $900 in terms of ticket. Since HD bottomed in August 2011 (coincided with the peak in gold?) the stock has more than doubled, but the valuation has looked full at every phase of the ramp.
With current consensus EPS at $3.53 and $4.12 for January '14 and January '15 fiscal years, HD is trading at 21(x) and 18(x) forward earnings for 13% and 16% growth respectively.
HD: All about the cash flow:
At 14(x) cash flow with a 6% free cash flow yield, HD is not really all that cheap on a cash flow basis either.
What has driven a lot of this earnings growth since 2008 has been share repurchases by HD. As productivity greatly improved and the retailer started generating more cash flow, HD's 4-quarter trailing free cash flow has more than doubled from $2.1 billion in Jan 2008 to $5.8 billion as of Jan '13, with about 2/3rd's of that going to share repo's and the remaining 1/3rd going to the dividend.
HD's cash flow history, with capex, share repo's and dividends
FCF as %
|1/08||$5.7 bl||$3.5 bl||$2.2||$10.8||$1.7 bl||577%|
* all numbers 4-quarter trailing, or fiscal year
As the reader can quickly see, free cash flow generation started to ramp sharply after 2008, which has allowed HD to both pay a nice dividend and repurchase shares.
The real question for HD though is, can the current stock run continue? The chart looks great. The May 2000 high of $70 was taken out pretty easily in March 2013 and it doesn't look to be slowing any, with the current recovery in housing.
We think HD is fully valued at $75, hence we aren't buying more at these levels. Our internal model values HD at $75, while Morningstar puts an intrinsic value on HD of $64.
To be frank with readers, though, HD has been walking up the valuation ladder for almost two years now, meaning that even with discounted cash flow models, the intrinsic value keeps getting taken higher as the retailer reports quarterly numbers.
We are waiting for a bigger pullback in the stock to add to our position, but what a great run for a well-known retail name, and what a great job the current management team has done driving profitability without much store or revenue growth.
The rebound of big-ticket comps is a big plus. With some growth in revenues from a return of the Pro or commercial builder business, the stock could run to $100, but right now store and limited revenue growth is keeping HD fully valued.