Home Depot Inc (NYSE:HD) stock is soaring today after a strong fourth-quarter earnings report tickled Wall Street’s fancy.
On the heels of these gains, HD stock is now up nearly 50% in the last year — quite a performance in contrast to the paltry 14% rally in the S&P 500.
Unfortunately, that massive run-up in Home Depot stock wasn’t entirely warranted, and shares look primed to stumble in the coming year as a laundry list of risk factors threaten to spoil the stock’s fantastical run.
It’s True, HD Earnings Were Pretty Darned Good
None of this is to take away from Home Depot, the company. The leading home improvement retailer has done a marvelous job executing recently and creamed fourth-quarter consensus estimates on both the top- and bottom-line.
It’s HD stock that doesn’t blow me away.
Results were impressive: Adjusted earnings for HD stock came in at $1 per share in the period, soaring 36% year-over-year and handily exceeding the 89 cents Wall Street expected. Revenue came in at $19.2 billion, again topping estimates calling for $18.7 billion.
But we aren’t done there! HD stock also raised its quarterly dividend by 26%, its sixth straight year of dividend hikes. And if that weren’t enough, Home Depot authorized an $18 billion stock repurchase program that replaces the $17 billion program approved in 2013.
All of this would seem to look pretty good for Home Depot’s fiercest rival, Lowe’s Companies, Inc. (NYSE:LOW), which reports earnings tomorrow. But before you go snapping up Lowe’s stock because of how HD stock is doing today, consider whether Home Depot might be the beneficiary of irrational exuberance.
3 Glaring Warning Signs for HD Stock
Although earnings were admittedly, “darned good,” there are some disconcerting warning signs to heed with HD stock.
The first is one that Home Depot openly stated in its own report: currency headwinds. The strong dollar could knock as much as $1 billion off its sales growth in 2015. HD stock, along with major multinational blue chip stocks like McDonald’s Corporation (NYSE:MCD), PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Co (NYSE:KO), is yet another globally diversified company feeling the pain from the dollar’s recent strength.
The second risk is another macroeconomic concern: the softening of the housing market. Existing home sales in January suffered a severe decline from December, falling nearly 5%; the 4.8 million annualized rate missed consensus estimates of nearly 5 million by a longshot.
Housing demand is a big part of Home Depot’s business, and if real estate continues to suffer, HD stock will feel the pain too as fewer people flock to its stores for remodeling wares.
The strong dollar and the weak housing market combine to form the third, and arguably ugliest, reason HD stock looks and feels overvalued: slowing sales growth. The company is calling for sales to increase by something between 3.5% and 4.7% in 2015 — a marked decrease from the 8.3% sales growth seen in the fourth quarter.
For some reason, Mr. Market decided to ignore these tempered expectations today, despite the fact that analysts expect 4.9% sales growth this year — a rate Home Depot itself admits doesn’t seem feasible. And it certainly shouldn’t command a 26 price-to-earnings ratio.
At the end of the day, as Frank Sinatra once crooned, “fools rush in,” and there seems to be no shortcoming of fools speculating in Home Depot stock today.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
