Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)  

Home Depot (NYSE:HD) is a home improvement retailer. On August 20, 2013, the company reported earnings of $1.24 per share, which beat the consensus of analysts' estimates by $0.03. The stock is up 31.26% in the last year, and is beating the S&P 500, which has gained 16.1% in the same time frame, and with that in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying some more of the stock right now for the services sector of my dividend portfolio.

Fundamentals

Home Depot currently trades at a trailing 12-month P/E ratio of 21.97, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 17.12 is currently fairly priced as well for the future in terms of the right here, right now. Next year's estimated earnings are $4.35/share. The one-year PEG ratio (1.23), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 17.91%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. Home Depot boasts a dividend of 2.09% with a payout ratio of 42.7% of trailing 12-month earnings while sporting return on assets, equity and investment values of 11.8%, 29.6% and 17.8%, respectively, which are all respectable values, but nothing to write home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.09% yield of this company is good enough for me to take shelter in for the time being. Home Depot has a long history of paying dividends but not really increasing them greatly during that time until recently. During the past four years the quarterly dividend has increased 69.5%, and most recently it has increased 34.5% (from $0.29 to $0.39)!

Technicals

(click to enlarge)

Looking first at the long-term relative strength index chart [RSI] at the top, I see the stock muddling around in middle territory with a value of 39.49 but with no real trajectory. I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is below the red line with the divergence bars decreasing in height to the upside, indicating the stock has upward momentum. As for the stock price itself ($74.10), I'm looking at the 20-day moving average to act as resistance and $74 to act as support for a risk/reward ratio, which plays out to be -0.14% to 2.66%.

Recent News

  1. IBM supplied a forecast in which it sees continued consumer spending at home improvement stores for the second half of 2013 and discretionary expenditures tightening for clothes and incidentals.
  2. The company declared a quarterly dividend of $0.39 per share with an ex-date of September 3, 2013 and a pay date of September 19, 2013.
  3. Citi keeps a "buy" rating on the company believing that it can capitalize on the consumer spending more money for home improvements.
  4. The company saw same store sales increase to 10.7% during the second quarter and increased earnings forecasts for the year to $3.60 per share as opposed to $3.52.

Conclusion

Home Depot is fairly valued based on future earnings and on future growth prospects (one-year outlook). Financially, the dividend payout ratio is middle of the road on trailing 12-month earnings and I don't doubt management will be able to continue to increase the dividend going forward; based on future earnings the dividend payout ratio goes down to around 36%. The technical situation of how the stock is currently trading shows the 20-day moving average crossing below the 50-day moving average which is a short-term bearish pattern, but the MACD chart shows a short-term bullish pattern. Personally I'm going to layer into the stock with a small position here and see what happens with the stock, I actually think it can get cheaper.

Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long HD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Should You Wait On Home Depot Until The Yield Increases?