Home Depot: Can You Imagine?

| About: Home Depot, (HD)


The Home Depot continues to be my home improvement store of choice.

Q1 earnings are out and I discuss key metrics.

There are so many positives with the company but one stands out above all others.

The Home Depot (NYSE:HD) continues to be my home improvement store of choice. I highlighted it exactly one year ago with a buy recommendation. Since that time the stock is up very nicely, about 18%. Of course, we have to factor in the very real point that stocks as a whole have been doing well in that time, save a brief selloff in January. Still, the Home Depot remains a strong name. Of course, it is certainly not the only player in the space. Despite "the Depot," as my sons like to call it, being my store of choice, I have shopped at the competition here and there. I think as a consumer the draw for me continues to be that the staff at Home Depot is often the most knowledgeable when it comes to customer questions I have as a homeowner when conducting so-called 'do it yourself' home improvements. This is why I choose the name.

Of course, not all Home Depot's may have the great staff that my local store has, but for the sake of argument I assume that the quality of the staff is roughly equivalent store to store. If not, then maybe my personal anecdote means little. But when combined with strong fundamentals and fiscal performance, I think such observations make a difference. All it takes is one bad experience at a store to lose a consumer, but it takes several positive interactions to gain loyalty. Home Depot has done just that. Ok, enough about me. The stock is set to open lower from its recent record highs, so is it time to lock in profits? Or, should you stick with it? To answer this question, we need to check into the performance of the company.

Home Depot reported its Q1 2016 earnings and it was once again a successful quarter. That said the company still has a valuation that is a pricing continued growth at 24 times current earnings. But this is justifiable if the growth will continue. Once again it seems that the growth is indeed set to continue. The company saw strong Q1 sales of $22.7 billion. This was a 9% increase compared to Q1 2015. Comparable store sales also rose. They came in +6.5% in Q1, and comparable sales for U.S. stores continue to be strong, coming in at +7.4%. This continues to be incredible growth for a company of this size.

As you can imagine rising comparable sales and higher revenues led to better earnings. Here in this report earnings per share were up 19% year over year. This helps justify the valuation. Net earnings for Q1 2016 came in at $1.8 billion. This translates to $1.44 per share, compared to $1.21 per share brought in during Q1 2015. Not all of the improvement is organic (that is from rising sales and controlled expenses). The earnings per share bump also reflects the company's buyback which improves the earnings a bit. Still the continued growth is impressive and as such this remains a stock that you should consider on any meaningful pullback. Craig Menear, Chairman and Chief Executive Officer and President of Home Depot, stated:

"We were pleased with our stronger than expected start to the year, driven by solid execution and broad-based growth across the store. This was made possible by our hard working associates and their continued dedication to our customers in a quarter marked by week-to-week demand spikes caused by weather variability."

Record sales and earnings. Both of which beat estimates. That is the type of growth you like to see from a company you are invested in. Above I alluded to organic growth of earnings. While the buyback had an impact on the per share measure, it is important to note that once again the 9.5% increase in revenues outpaced increases in operating expenses. Operating expenses did rise to generate these revenues, but not at the same pace as revenues coming in. Selling and administrative expenses rose to $4.28 billion from $4.16 billion, a rise of 2.8%. Depreciation and amortization was up $14 million from Q1 2015 to $433 million, a rise of 3.3%. This led to total operating expenses rising just 2.9% to $4.7 billion. The ongoing fact that the company is able to keep costs from rising at a large rate even though sales are increasing at a strong clip remains a testimony to this company's strength.

There is one thing I have told you above all else that I love about the company. And that is that Home Depot is a serial guidance raiser. That is right. It guides, and re-guides higher. It meets or beats expectations on many metrics. In this report the company raised its guidance for sales again. It now sees sales up 6.3% versus last year (up from 5.1 to 6%), with comparable store sales growth as high as 4.9%. Operating margins are expected to expand, with gross margins flat-to-up. Home Depot will purchase another $5.0 billion in shares and now sees earnings coming in at $6.27 (up from $6.12 to $6.18). Bottom line, the company continues to ramp up sales and earnings. Guidance is strong. I am a buyer on a continued pullback.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HD over 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.