Home Depot (HD, Financial) reported its second-quarter earnings last week.
The home improvement store delivered a 6.62% top-line growth to $26.47 billion accompanied by 9.3% profit growth to $2.44 billion. In return, its share price dipped almost 1% (0.65%) post-earnings announcement.
(Home Depot Q2 Infographic, Quarterly Filing)
Home Depot
According to its filing, the 38-year-old Home Depot® is the world's largest home improvement retailer. As of fiscal year 2015, the company had total sales of $88.5 billion and total profits of $7 billion, representing a 7.92% profitability.
(Home Depot Cover, Annual Filing)
The Home Depot sells a wide assortment of building materials, home improvement products and lawn and garden products and provides a number of services. The company also had a total store count of 2,274 last year.
These stores are located throughout the U.S., Puerto Rico, the U.S. Virgin Islands, Guam, Canada and Mexico.
Home Depot had 1,977 (86.9%) of its stores in the U.S. with 182 in Canada and 115 in Mexico. Besides the brick-and-mortar stores, the company maintains an online website.
In its filing, Home Depot subdivided its business into at least 15 segments to show how each segment had contributed to its overall sales. From the most sales to the least, these segments are Indoor Garden (9.4% of total sales), Paint, Kitchen and Bath, Outdoor Garden, Appliances, Building Materials, Plumbing, Lumber, Flooring, Tools, Electrical, Hardware, Millwork, Décor and Lighting (3% of total sales).
(Home Depot, Annual Filing)
As observed, no segments suffered any actual negative growth in the past three years. Some even delivered double-digit sales growth, such as appliances (14% growth from fiscal 2014), plumbing (11%) and tools (12%). Also, Home Depot had overall positive comparative store sales in fiscal 2010.
Share price and market return
Home Depot has provided an average annual total return of 29.39% since 2010 while the broader Standard & Poor's 500 has given 12.58%. Year to date, however, the broader market gained more (6.85%) than Home Depot (2.43%).
Cash, debt and book value
As of July 31, Home Depot’s unaudited financials revealed that it had $4 billion in cash and $20.9 billion in debt. The company had a debt-equity ratio of 3.14; this figure has grown over the past quarters and from 1.17 in the first quarter of 2014. Home Depot also had a book value of $6.66 billion, 31.64% or $2.1 billion of which is goodwill.
(Home Depot, 2007 Annual Filing)
Cash flow
In fiscal 2015, Home Depot grew its cash flow from operations by 13.7%. The company spent $1.5 billion in capital expenditures, leaving it with $7.9 billion in free cash flow; 89%, or $7 billion, of the free cash went into share buybacks whereby Home Depot probably paid at a price-earnings (PE) multiple of 22 times (annual multiple average) for its shares that year. This was its highest earnings multiple in the past decade. Nonetheless, Home Depot has been repurchasing its shares.
Home Depot also reduced its debt by just $39 million while taking in $4.05 billion.
Valuations
According to GuruFocus data, Home Depot has a trailing 12-month (ttm) PE ratio of 22.8 times (industry median of 19 times), price-to-book (PB) value of 25 times (industry median of 1.57 times) and price-sales (P/S) ratio of 1.91 times (industry median of 0.62 times). Also, Home Depot’s ttm dividend yield is 1.89% with a payout ratio of 43% and a five-year dividend growth rate of 20.9%.
The S&P 500, meanwhile, trades for P/E of 25 times and P/B of 2.9 times.
Conclusion
For me to label a company great and outstanding, the company must:
- Have been actively trading for more than a decade or two.
- Be selling at a discount compared to its peers and the broader market.
- Have been growing its dividends, including acceptable payout levels.
- Have been continuously appreciating market share price.
- Have resiliency during the hard times (recessions).
- Have acceptable sales growth projections.
- Have good balance sheet figures, including less blue sky materials.
- Have quality management.
- Have steady and probably increasing profitability.
- Have few or no impairment charges.
- Have steady cash flow generation.
Most of the things I listed above have been met by Home Depot. It did not meet my stringent requirements in balance sheet and goodwill figures and valuation measures. Nonetheless, Home Depot has been rewarded fairly well by Mr. Market all this time. It would probably not be prudent to buy its shares during the recent share price high.
(Home Depot market price, Google Finance)
Disclosure: I do not have shares in Home Depot nor plan to go long this week.
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