Shares of The Home Depot Inc. (HD, Financial) are moving almost 4% following Thursday morning's session after the company reported better-than-expected earnings for Q3.
The company reported earnings per share of $1.35, which are higher than the $1.15 per share obtained in the same quarter a year ago and are higher than estimates by 3 cents. Further, revenue increased by 6.4% and reached $21.8 billion in line with analyst’s estimates. Comparable store sales for the quarter were positive 5.1%, and comp sales for U.S. stores were positive 7.3%.
The company operates a chain of more than 2,200 retail warehouse-type stores, selling a wide variety of home improvement products for the do-it-yourself and home remodeling markets.
"During the quarter, we saw broad-based growth across our geographies and product categories, led by growth in transactions from both our DIY and Pro customers," said Craig Menear, chairman, CEO and president. "I would like to thank our associates for their hard work and dedication to our customers."
Regarding future expectations, Home Depot expects fiscal 2015 sales growth of approximately 5.7%, with comps of approximately 4.9%. Also, it expects fiscal 2015 diluted earnings per share to grow by approximately 14% to $5.36.
The company is selling at a reasonable valuation. The P/E ratio is at 23.52x, which is higher than the industry median, and it is close to a 10-year high of 25.08x. All the metrics that involve price in the numerator are trading higher than in the past because the stock price is close to a 10-year high.
When thinking about the firm's drivers, we must highlight the economies of scale that should contribute to margin expansion in the future. Further, the firm’s cross-selling strategy is important for future growth. Looking ahead, macro and demographic trends, such as the aging of houses or the levels of interest rates, should boost remodeling efforts. The company has delivered good returns on invested capital (ROIC) recently, to 24.3% in fiscal 2015, from 20.5% in fiscal 2014, 17.2% in fiscal 2013 and 14.6% in fiscal 2012. Moreover, the company has returned $35 billion to its shareholders through dividends and share buybacks over the past five years
Home Depot has enjoyed a strong performance in the market. The stock returned 15.12% on a year-to-date basis and 23% in the past 12 months. In a previous article, we found that its price was smaller than its intrinsic value, so we have recommended buying the stock because it was undervalued. Since then, investors would have earned 17% from price appreciation.
Yahoo! (YHOO, Financial) Finance is bullish on the stock with a price target of $131.48. Meanwhile, in the hedge fund world, Ken Fisher (Trades, Portfolio) is the major shareholder among the gurus, with a stake containing 8.37 million shares of the stock in Q3. Jeremy Grantham (Trades, Portfolio) has initiated a new position with 1,396,354 shares, and John Burbank (Trades, Portfolio) did the same with 26,505 shares. Further, First Eagle Investment (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) have taken long positions in the stock during the third quarter by 44.76% and 22.08%.
Disclosure: Omar Venerio holds no position in any stocks mentioned
