Home Depot Potential Data Breach May Have Presented A Good Opportunity To Buy The Stock

The last time I analyzed The Home Depot, Inc. (NYSE:HD) on May 24, 2014, I stated, "Due to the bullish technicals, great near-term earnings growth potential, and great long-term earnings growth potential, I'm going to be pulling the trigger on a small batch right now." Since the article was published the stock has increased 15.7% versus the 5.62% gain the S&P 500 (NYSEARCA:SPY) posted. Thankfully I bought some shares after writing the article to realize some of the appreciation. Home Depot is a home improvement retailer. Its stores sell an assortment of building materials, home improvement and lawn and garden products and provide a number of services.

On August 19, 2014, the company reported second quarter earnings of $1.52 per share, which beat the consensus of analysts' estimates by $0.07. In the past year, the company's stock is up 26.01% excluding dividends (up 28.15% including dividends) and is beating the S&P 500, which has gained 21.28% in the same time frame. Since initiating my position back on June 18, 2013, I'm up 16.61% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the services sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 21.81, 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 17.58 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.37), 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 15.87%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 15.87%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 16.6%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.05% with a payout ratio of 45% of trailing 12-month earnings while sporting return on assets, equity and investment values of 13.6%, 46% and 22.3%, respectively, which are all respectable values.

The really high return on equity value (46%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Home Depot is second highest in the Home Improvement Stores industry behind Builders FirstSource, Inc. (NASDAQ:BLDR) which sports an ROE of 169.4% and ahead of Lumber Liquidators Holdings, Inc. (NYSE:LL) which sports a ROE of 23.3%).

Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.05% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 5 years at a 5-year dividend growth rate of 11.6%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Technicals

Click to enlargeLooking first at the relative strength index chart [RSI] at the top, I see the stock near overbought territory with a current value of 68.36. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross below the red line with the divergence bars decreasing in height indicating bearish momentum. As for the stock price itself ($91.61), I'm looking at $97.63 to act as resistance and $88.45 to act as support for a risk/reward ratio which plays out to be -3.45% to 6.57%.

Data Breach May Have Been A Buying Opportunity

During the past week the company experienced a drop of 2.5% because of a report that the company may have experienced a credit card breach. It has been said that the hacking attempts were made by Russian and Ukrainian individuals and may be related to the global tensions taking place in the region right now due to the interventions made by the U.S. This however may have been a buying opportunity in the name as opposed to the situation that happened earlier in the year with Target (NYSE:TGT). Target's stock price has yet to recover due to their credit card breach because the company may actually be broken, whereas Home Depot has a great economic story going on right now which doesn't make the company broken, but just the stock.

Conclusion

The breakout on earnings last month was of epic proportions, raising full year guidance, and that is why I believe the company isn't broken, but the stock is on data breach news. CEO Frank Blake however will be stepping down soon, and a lot of good news has been priced into the name, it's for those reasons I was actually thinking of stepping out of the stock during my quarterly change out in August. I ended up keeping the name and may have been presented with a good opportunity to buy the name again with this bit of news.

Home Depot just seems to be able to deliver year after year, and is thriving right now as the consumer continues to spend on their house. The company has been accelerating higher after reporting earnings up until the news about the potential data breach. Home Depot is one of those stocks that rarely give you a good entry point just like Disney, but this may just be the opportunity.

Mr. Blake has been building a great supporting cast during his tenure and I have no doubt the incoming CEO will do a great job as well. The company operates virtually in a duopoly with Lowe's (NYSE:LOW) but Home Depot is definitely best of breed and is probably one of the best retailers around. The stock should be heading higher with what is perceived as an improving job market, improving economy, and improving credit lending.

What's even better is that Home Depot is purely a domestic play. It is insulated from any of the geopolitical drama taking place in the Middle East and Eastern Europe. Companies which have international exposure in those regions have been getting left in the dust of late as the broader market continues to rally.

Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and on earnings growth potential, while 2015 earnings estimates have increased by 1.8% since the last time I wrote about the stock. Financially, the dividend is small and I believe it can grow a bit more while the financial efficiency ratios have been increasing. On a technical basis the risk/reward ratio shows me more reward than risk but I don't like the momentum or the relative strength right now. The stock has definitely run up quite a bit since the last time I analyzed it and this makes me a bit wary of putting anymore capital to work in the name right now. For now I'm going to buy a really small batch in the next couple of days and continue to hold tight to what I already have.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. 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!