Seeking Alpha
Profile| Send Message|
( followers)  

Echo To All submits: Home Depot (NYSE:HD) is selling its Supply business and buying back $22.5B worth of shares. THIS IS HUGE. $22.5B represents about 28-29% of shares. With a share count of 1.97B, a buyback will leave the share count to 1.40. (Assuming the buyback occurs by the end of the 2009 year, and not accounting for option dilution.) Here is a quick run down from a trader’s perspective.

So lets take a look at HD’s PE: PE is currently around 14-15, arguably cheap. Now lets account for the share buyback and the removal of the Supply biz. On the back of the envelope calculation and estimates, the Supply biz will account for about 30 cents of the current 2009 earnings estimate. (Disclaimer: my estimate is crude and meant to be quick and simply good enough for an initial assessment.)

Now, current 2009 average earnings estimates are at 2.91. Take away the 30cents, and factor in the new float amount ($2.61×1.97B/1.40B=$3.67). This would leave HD with an assumed forward PE (with a share price of 40) of 10.9! That makes HD REALLY really cheap here. (Again, the above eps estimate does not take a lot of things into account and is meant to be a crude quick assessment.)

Keep in mind however, the the Supply business is currently a relatively good business and growing nicely, but at a low margin. The Supply biz is arguable a very good long-term business. HD does not need to sell it to focus on retail. HD has a tremendous amount of free-cash flow to use to focus on retail, which they have been doing, but that is not good enough for the relatively short-term mentality of most pseudo investors.

The quickest way (relatively speaking) to boost the stock from its already cheap valuation is to issue a huge buyback. The only way they can do this is to sell off the Supply biz, which is a shame for the real long-term investors. But the stock will now be looking to the upside because supply of the stock will be reduced by some 30%… i.e financial engineering, irrespective of the condition of the retail side of HD’s business.

Technically the stock looks good, especially with the AH indicative pop HD will see today. A short-term negative trend will be broken.

HD1

A look at the weekly suggests a buyback of this size should be able to take out topline resistance:

HD2

So… buy up.

Source: Home Depot Selling Supply Business, Issuing $22.5B Buyback