Home Depot Earnings Hammer Estimates . . . Again

Home Depot (NYSE: HD) just won’t quit. The company has beaten earnings estimates in 27 of the last 28 quarters, meaning it has beaten analyst expectations every time over the past seven years.home-depot-hammer
Home Depot on Tuesday reported sales of $20.9 billion for the first quarter, up 6.1%. Comparable store sales killed it as well, up 6.1%. Home Depot’s net earnings came in at $1.6 billion or $1.16 per share, up from $1.4 billion or $1 per share. I’ve backed out about $0.05 in earnings from a $71 million benefit from a tax audit.
Sometimes, though, earnings can be deceiving if cash flow isn’t all that great. Home Depot, however, delivered on that front as well. Operating cash flow came in at $3.4 billion, up from last year’s $2.57 billion. Free cash flow was $3.08 billion, a big increase from last year’s $2.28 billion.
Meanwhile, the company also raised guidance for the full fiscal year. It projects sales up 4.2% to 4.8%, with comps up 4% to 4.6%. It raised its earnings per share to about $5.20, not including the tax audit benefit.
Home Depot also authorized an $18 billion share repurchase program, boosted its dividend by 26% to $0.59 per share, and expects EPS of $5.14 in FY15, up 13% after including repurchases.

A Beautiful Balance Sheet

Home Depot has a great balance sheet, with $2.8 billion in cash, and $13.8 billion in long-term debt that costs a little over 6% in interest.
When we break down the Home Depot earnings numbers further, and look at what management said, it’s clear that the company is roaring along with clear skies ahead. First, management said there was strength across the board, attributed to a robust recovery in housing. There was strength regionally, in the top 40 markets, and in all product departments, with tools leading the way.
The company doesn’t seem to care about the weak overall economic recovery. Gross domestic product may be lagging badly – with the first fiscal quarter virtually flat – but consumers don’t care. If they want to improve their home, and they have the money, they are obviously spending it.
Specifically, Home Depot released a very interesting metric. Small tickets increased 3.2%, but purchases over $900 increased 6.8%. That suggests people aren’t merely maintaining their homes, but doing bigger projects, which itself reflects optimism about home prices.
Meanwhile, Home Depot stock has been on a tear. Back before the financial crisis, the stock hit a high of $35, then lost 50% to $16 as the financial crisis hit its worst point. Since then, however, the stock has soared to $110.
That’s right. You could have had an eightfold increase in Home Depot stock over the past seven years. The last place I would have expected to find a multi-bagger is a big blue chip stock.

Savvy Management

It also speaks to the company’s smart management. During the financial crisis, Home Depot drastically cut costs and increased efficiency. The company had more flexibility than most because of its great free cash flow and cash on hand, so it was able to weather the storm.
Now that the worst has passed and Home Depot is roaring along, it can plow excess cash into stock buybacks and its dividend.
As for now, the stock trades at $110. With FY 15 estimates of $5.20, it is thus trading at about 21 times earnings. However, EPS growth this year is expected to be 15%, which matches analysts’ long-term estimates. So it trades at a PEG (price/earnings-to-growth) ratio of 1.4, while competitor Lowe’s Companies (NYSE: LOW) trades at 21 times earnings on 21% earnings growth for a PEG ratio of 1.0.
That’s why I suggest you dump Home Depot and move into Lowe’s.

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