Shares of Home Depot Inc. (HD, Financial) have fallen 6.5% since its late February earnings release. More than that, the stock is down almost 100 points, or 23%, from its 52-week high of $420.61.
Let’s take a closer look at the company to see why the stock offers good value currently.
Earnings highlights
Home Depot reported fourth-quarter and fiscal year 2021 earnings results on Feb. 22. For the quarter, revenue grew nearly 11% to $35.7 billion, beating estimates by $873 million. For the fiscal year, adjusted earnings per share of $3.21 was a solid improvement from the prior year’s figure of $2.74. A lower share count did aid results, but net earnings still improved more than 17% to $3.4 billion.
For the year, revenue grew 14.4% to $151.2 billion. Adjusted earnings per share of $15.53 was a 30% increase from the previous year while net earnings improved 27% to $16.4 billion
As with prior quarters, growth was broad based for the company. For the quarter, comparable sales were up 8.1%, including up 7.6% in the U.S. Comparable sales were higher by 11.4% for the fiscal year, with U.S. same-store sales growing 10.7%.
Customer transactions were lower by 3.4%, but the average ticket size improved 12.4% to $85.11. All regions that Home Depot operates in saw positive comparable sales, with all merchandizing departments also showing growth.
Home Depot’s digital channel continues to add meaningfully to the business. This channel grew 6% and 9% for the quarter and fiscal year, respectively, but have doubled over the last two years.
The company also announced a 15.2% dividend increase, marking its 14th consecutive year of dividend growth.
Home Depot provided an outlook for the new fiscal year as well, with leadership expecting comparable sales to be slightly positive and earnings growth in the low single digits. Consensus estimates had expected slightly more than 4% growth for the new year.
Takeaways
Company-wide comparable sales in the fourth quarter easily topped consensus estimates of 5.3% as Home Depot continues to resonate with customers.
Just as impressive is that Home Depot has produced these growth rates despite excellent results in the prior year. For example, the fourth quarter of fiscal year 2020 had comparable sales of 24.5% company-wide and 25% for the U.S., giving the retailer a two-year stacked growth rate that is approaching 33% for both company-wide and U.S. comparable sales.
Like its peer Lowe’s Companies Inc. (LOW, Financial), Home Depot did see a reduction in the number of customer tickets as transactions declined 3.4%. Offsetting this was a 12.4% increase in the size of the average ticket, as those that did visit the store spent considerably more in the most recent quarter.
Home prices nationwide remain elevated and demand continues to outweigh supply. This has led to many consumers spending to update their existing homes, either to maximize their return when they do put their house on the market or to improve their current living conditions. The company should continue to see tailwinds from this environment as home prices remain elevated.
Leadership’s guidance calls for a slightly positive comparable sales figure, which speaks to the strength of the company given what has transpired in the business over the past two years.
Despite this performance, shares of Home Depot decreased almost 9% following the release of earnings. Below consensus earnings guidance and a flat operating margin were the likely culprits for the selling. Home Depot, along with much of retail, is facing headwinds from supply chain issues and higher employee compensation. Total operating expenses increased 4.3% in the fourth quarter and 4.6% for the fiscal year.
The unemployment rate for February was 3.8%, so the labor market remains very tight. Higher raw material costs also remain an issue, but the company can raise prices to balance these expenses out.
While these challenges will likely remain an issue, the good news is Home Depot isn’t seeing that much drop off in demand. Total tickets did decrease during the quarter, but this was more than offset by low double-digit ticket size increase.
Professional and do-it-yourself customers were up double digits on a two-year basis. This growth doesn’t appear to be subsiding either as both customer types had accelerated growth on a sequential basis from the third quarter of fiscal year 2021.
Valuation analysis
Overall, Home Depot’s most recent quarter was very strong even if guidance was just below what the market had anticipated. Given its broad strength, the selloff looks to be overdone.
The plus side of such a decline in share price is that Home Depot’s valuation is now much more in line with its historical average. According to Value Line, the stock has an average price-earnings ratio of 19.7 over the last decade. Analysts surveyed by Yahoo Finance are expecting $16.10 of earnings per share for this fiscal year. With the stock trading at 20 times estimates, Home Depot’s stock is trading very close to its long-term average multiple.
On the other hand, the GF Value Line shows the stock to be trading below its intrinsic value.
Home Depot has current share price of $322 and a GF Value of $344.91, giving the stock a price-to-GF Value ratio of 0.93. Reaching the GF Value would mean a 7.1% return from the current share price.
This is before adding in the stock’s dividend yield, which is 2.4% at the moment, to total returns. The current yield is also above the 10-year average yield of 2.3% and is 100 basis points better than the average yield of the S&P 500 Index.
Final thoughts
Home Depot saw another quarter of high comparable sales growth, made even more notable when stacked on to the prior year’s exceptional results.
The market soured on the guidance, but Home Depot is still expecting to see positive comparable sales for the new fiscal year even after a 33% increase over the last two years. The fact the company is even expecting some growth in the new fiscal year is evidence of its ability to not only attract, but to keep customers coming back to its stores and spending more.
At the same time, Home Depot’s valuation is close to its historical performance. GuruFocus also shows the stock has upside potential based on intrinsic value.
The business is performing well, the valuation is at a reasonable level and the stock has a slightly higher-than-usual dividend yield, suggesting this could be a good time to own shares.
