Home Depot Q1 2016: What To Expect

| About: Home Depot, (HD)

Summary

Home Depot is scheduled to report its first-quarter fiscal 2016 financial results on Tuesday, May 17, before market open.

According to 23 analysts' average estimate, HD is expected to post a profit of $1.34 share, a 15.5% rise from its actual earnings for the same quarter a year ago.

As I see it, the company will continue to benefit from an improving housing market and strong demand from professional contractors.

HD has recorded substantial growth in the last few years. It generates strong cash flow, and returns significant capital to its shareholders by stock buyback and increasing dividend payments.

The average target price of the top analysts is at $145, an upside of 6.9% from its April 22 close price, however, in my opinion, shares could go even higher.

I find The Home Depot (NYSE:HD), the world's largest home improvement retailer, an excellent high-growth dividend stock. The company is benefiting from an improving housing market and strong demand from professional contractors. The housing market is poised to strengthen, about two-thirds of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. Home Depot has recorded substantial growth in the last few years. The company's annual average EPS growth over the last five years was very high at 22.1%, and the average annual estimated EPS growth for the next five years is also high at 13.8%. Furthermore, the average dividend growth over the last five years was very high at 20.1%.

Source: finviz.com, Portfolio123

Last Quarter Results

On February 23, Home Depot reported record fourth quarter and full fiscal year 2015 financial results, which beat EPS expectations by $0.07 (6.4%). Sales climbed 9.5% to $21 billion, beating analysts' $20.4 billion projection. The company showed earnings per share surprise in three of its last four quarters, as shown in the table below.

Data: Yahoo Finance

Comparable sales increased 7.1%, which was above the consensus growth estimate of 4.3%. Comp sales at U.S. stores were up an impressive 8.9%, above the consensus of 5.3%. Online sales rose about 25%. Net earnings for the fourth quarter of fiscal 2015 were $1.5 billion, or $1.17 per diluted share, compared with net earnings of $1.4 billion, or $1.05 per diluted share, in the same period of fiscal 2014. For the fourth quarter of fiscal 2015, diluted earnings per share increased 11.4% from the same period in the prior year. The company projected that its robust sales growth would continue this year, with consumers showing no signs of pulling back on renovations and projects.

In the report, Craig Menear, chairman, CEO and president, said:

Our focus on improving the interconnected customer experience, along with solid execution and continued recovery in the U.S. housing market, resulted in record sales and net earnings for 2015.

First Quarter Fiscal 2016 Report

Home Depot is scheduled to report its first-quarter fiscal 2016 financial results on Tuesday, May 17, before market open. According to 23 analysts' average estimate, Home Depot is expected to post a profit of $1.34 a share, a 15.5% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $1.46 a share while the lowest is for a profit of $1.28 a share. Revenue for the first quarter is expected to increase 6.2% year-over-year to $22.19 billion, according to 21 analysts' average estimate. There were two up revisions during the last seven days and two EPS up revisions during the last 30 days. Since Home Depot has shown earnings per share surprise in three of its last four quarters, there is a good chance that the company will beat estimates also in the first quarter.

I see continued high growth prospects for the company. Home Depot is significantly investing in two growth areas. The first is around its professional customer, the contractor. The company sees it as a massive growth opportunity because of the changing demographics in the country with the aging population. There is a high tendency for customers to do-it-yourself, but increasingly customers want that done for them, and they want to engage a contractor or a professional customer. The second is interconnected retail or the online part of its business. According to the company, it is the online properties that add value to its physical locations and its physical locations add value to its online properties, actually coming together in a seamless way to give the customer good experience.

Valuation

Since the beginning of the year, HD's stock is up 2.6% while the S&P 500 Index has increased 2.3%, and the Nasdaq Composite Index has lost 2.0%. Since the beginning of 2012, HD's stock has gained an impressive 222.7%. In this period, the S&P 500 Index has increased 66.3%, and the Nasdaq Composite Index has risen 88.3%. According to TipRanks, the average target price of the top analysts is at $145, an upside of 6.9% from its April 22 close price, however, in my opinion, shares could go even higher.

HD Daily Chart

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HD Weekly Chart

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Charts: TradeStation Group, Inc.

Although HD's stock is not cheap regarding its valuation multiples, it is not very expensive either. The trailing P/E is at 24.85, and the forward P/E is at 19.24. The Enterprise Value/EBITDA ratio is at 13.86, and the PEG ratio is at 1.40.

In addition, most of HD's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the table below.

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Source: Portfolio123

Dividend

Home Depot has been paying uninterrupted dividends since 1987. Along its fourth quarter earnings release the company announced that its board of directors declared a 17% increase in its quarterly dividend to $0.69 per share, saying:

As a testament to our commitment to create value for our shareholders, the board has increased the dividend for the seventh consecutive year.

the forward annual dividend yield is at 2.03% and the payout ratio is at 43%. The annual rate of dividend growth over the past three years was very high at 23.3%, over the past five years was also very high at 20.1%, and over the past ten years was at 19.4%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and HD's performance has been impressive in this respect.

The Company reiterated its capital allocation principles:

  • Dividend Principle: Targeting a dividend payout ratio of approximately 50 percent of net earnings.
  • Share Repurchase Principle: After meeting the needs of the business, use excess cash to repurchase shares, with the intent of completing its remaining $11.0 billion share repurchase authorization by the end of fiscal 2017.
  • Return on Invested Capital Principle: Maintain a high return on invested capital, with a goal of reaching 35 percent by the end of fiscal 2018.

Summary

Home Depot is scheduled to report its first-quarter fiscal 2016 financial results on Tuesday, May 17, before market open. According to 23 analysts' average estimate, Home Depot is expected to post a profit of $1.34 a share, a 15.5% rise from its actual earnings for the same quarter a year ago. Since Home Depot has shown earnings per share surprise in three of its last four quarters, there is a good chance that the company will beat estimates also in the first quarter. Home Depot has recorded substantial growth in the last few years. As I see it, the company will continue to benefit from an improving housing market and strong demand from professional contractors. Furthermore, the company generates strong cash flow, and returns substantial capital to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $145, an upside of 6.9% from its April 22 close price, however, in my opinion, shares could go even higher.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.