Home Depot Hammers The Earnings Nail On The Head

| About: Home Depot, (HD)

Summary

The company missed analyst expectations, but revenue and earnings increased from the prior year.

The stock is fairly valued on 2015 earnings estimates at this price.

Comp store sales increased year over year by 2.6%.

The last time I wrote about The Home Depot, Inc. (NYSE:HD) I stated:

"Due to the bullish technicals, increasing return on equity and inexpensive valuation based on 2015 earnings I'm going to be pulling the trigger on a batch of this particular name right now." Since that article was published the stock is up 1.8% while the S&P 500 (NYSEARCA:SPY) is up 0.56%. Home Depot is a home improvement retailer.

The company reported earnings before the market opened on 20May14 and on the surface the results were bad with the company reporting earnings of $0.96 per share (missing estimates by $0.03) on revenue of $19.7 billion (missing estimates by $250 million). The stock increased 1.91% after reporting earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Income Statement

Income Statement (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Revenues

$ 19,687

$ 17,696

$ 19,124

11%

3%

Cost of sales

$ 12,802

$ 11,504

$ 12,445

11%

3%

Gross profit

$ 6,885

$ 6,192

$ 6,679

11%

3%

Selling, general and administrative

$ 4,194

$ 4,024

$ 4,183

4%

0%

Depreciation and amortization

$ 414

$ 407

$ 402

2%

3%

Operating Income

$ 2,277

$ 1,761

$ 2,094

29%

9%

Interest and investment income

$ (100)

$ (4)

$ (3)

2400%

3233%

Interest expense

$ 191

$ 182

$ 164

5%

16%

Other

$ -

$ -

$ -

N/A

N/A

Earnings before income taxes

$ 2,186

$ 1,583

$ 1,933

38%

13%

Provision for income taxes

$ 807

$ 570

$ 707

42%

14%

Net earnings

$ 1,379

$ 1,013

$ 1,226

36%

12%

Avg. diluted outstanding shares

$ 1,376

$ 1,391

$ 1,478

-1%

-7%

Earnings per diluted share

$ 1.00

$ 0.73

$ 0.83

38%

21%

Click to enlarge

With an increase of 11% on the top line I'd expect to see that to extend to the bottom line and it most certainly did as the bottom line increased by 21% from last year. I'd like to delve through the income statement to see why that may have been the case. Gross profit increased 3% off the bat. That number helped increase operating income by 9% from the prior year. Interest and investment income increased 3233% from the prior year while interest expenses increased 16% leading to an increase of overall earnings before income taxes of 13%. Of course taxes increased as revenues increased, but taxes increased at a clip of 14%. After taxes net earnings were increased by 12% from last year and a 7% reduction to the diluted share count is what helped earnings increased by 21% from last year.

Balance Sheet

Balance Sheet (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Cash and cash equivalents

$ 2,511

$ 1,929

$ 4,337

30%

-42%

Receivables

$ 1,831

$ 1,398

$ 1,658

31%

10%

Merchandise inventories

$ 12,343

$ 11,057

$ 11,825

12%

4%

Other current assets

$ 830

$ 895

$ 800

-7%

4%

Total current assets

$ 17,515

$ 15,279

$ 18,620

15%

-6%

Property and equipment

$ 23,238

$ 23,348

$ 23,906

0%

-3%

Goodwill

$ 1,293

$ 1,289

$ 1,187

0%

9%

Other assets

$ 583

$ 602

$ 482

-3%

21%

Total assets

$ 42,629

$ 40,518

$ 44,195

5%

-4%

Accounts payable

$ 7,739

$ 5,797

$ 7,384

34%

5%

Accrued salaries and related expenses

$ 1,233

$ 1,428

$ 1,264

-14%

-2%

Current installments of long-term debt

$ 34

$ 33

$ 1,332

3%

-97%

Other current liabilities

$ 4,259

$ 3,491

$ 4,038

22%

5%

Total current liabilities

$ 13,265

$ 10,749

$ 14,018

23%

-5%

Long-term debt, excluding current installments

$ 14,707

$ 14,691

$ 11,460

0%

28%

Other long-term liabilities

$ 2,511

$ 2,556

$ 2,324

-2%

8%

Total liabilities

$ 30,483

$ 27,996

$ 27,802

9%

10%

Click to enlarge

Looking at the asset side of the equation on the balance sheet we see an immediate 42% reduction from last year on the cash and equivalents line item. Receivables increased by 10% but it wasn't enough to stop the drop on the total current assets as a 6% dip was realized. On the longer-term assets we saw an increase of 21% but also wasn't enough to stop the drop in total assets as a 4% drop was realized.

On the liability side of the equation there was a 97% drop in current installments of long-term debt which helped total current liabilities drop 5%, however there was a 28% to long-term debt which made liabilities increase 10% on the whole.

Conclusion

The company reported earnings which were 21% higher than a year ago on 3% more revenue while the share price was up 0.62% since the last earnings call. These were good results to me and make me want to buy shares of the company. The stock is one of the smallest positions in my dividend portfolio. Comparable store sales increased 2.6% from last year and were led by a 3.3% increase in comp U.S. sales. The number of transactions also increased 2.2% from last year to 344.5 million. The guidance for second quarter was also increased to $4.42 citing late first quarter strength that appeared to blend into the second quarter. That being said, I think the stock is fairly valued and I'll be buying it on any dips. With these results the stock is on my team and in the starting lineup.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. 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, SPY. 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.