Portfolio Playoffs Semi-Final Game: Home Depot Vs. Williams-Sonoma

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Includes: HD, WSM
by: Abba's Aces

Summary

Underdog Home Depot was able to pull the upset victory over Williams-Sonoma in a series sweep.

Williams-Sonoma appears to be a bit overvalued at this point in time as it lost every matchup in the valuation portion of the series.

The winner of this tournament last year, KLA-Tencor, went on to produce a 38.35% gain including dividends versus the S&P 500 which gained 13.1%.

In the semi-final round of the Portfolio playoffs we have #5 seeded Home Depot (NYSE:HD) taking on #4 seeded Williams-Sonoma (NYSE:WSM). Home Depot is very famously known for being a home improvement retailer and barely got past the first round of the tournament with a victory over Citi (NYSE:C) while Williams-Sonoma is a home furnishings services store.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

HD

18Nov14

1.15

1.13

20.52

20.47

WSM

19Nov14

0.68

0.63

1.14

1.12

Home Depot is up 26.3% excluding dividends in the past year (up 28.43% including dividends) while Williams-Sonoma is up 26.74% excluding dividends (up 28.8% including dividends), and the S&P 500 has gained 12.38% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will go on to the conference finals to play against Amgen (NASDAQ:AMGN).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. Home Depot carries a 1-year forward-looking P/E ratio of 19.79 which is fairly priced for the future right now while Williams-Sonoma's 1-year forward-looking P/E ratio of 20.67 is also fairly priced. Game 1 goes to Home Depot.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a former capital projects manager that performed strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for Home Depot is currently at 1.44 based on a 1-yr earnings growth of 16.37% while Williams-Sonoma's 1-yr PEG ratio is 1.85 based on a 1-yr earnings growth rate of 13.19%. Home Depot takes Game Two away from Williams-Sonoma for a two game lead.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. Home Depot has a projected EPS growth rate of 16.37% while Williams-Sonoma sports a growth rate of 13.19%. Home Depot takes game three away and is a game away from clinching the series.

Dividend Yield

Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. Home Depot pays a dividend of 1.82% while Williams-Sonoma pays a dividend of 1.76%. Home Depot sweeps the series with this victory.

Conclusion

Although Williams-Sonoma lost to Home Depot in the series, Williams-Sonoma is still a great company for a portfolio. Even though Williams-Sonoma is a great company it appears the stock is a bit overvalued right now as it was upset in a series sweep where fundamental metrics are measured first. Home Depot on the other hand has been making great returns for investors for quite some time now and will probably continue to do so going into the future. After sweeping the series Home Depot advances to take on #1 seeded Amgen in the conference finals.

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: The author is long HD, WSM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.