Following the exceptionally strong results from Home Depot (HD) stock in the previous quarter, I finally went long after years of contemplation. This quarter’s results were just as strong, and the only thing I’m upset about is not having bought Home Depot stock sooner.
Home Depot is now 36 years old and has 2,263 stores. Even after all these decades, it continues to grow at a fantastic pace.
For Q3, Home Depot stock reported sales of $20.5 billion, up 5.4% year-over-year. Those all-important comparable store sales gained 5.2%, and comps for U.S. stores increased 5.8%. These are the kinds of comps you want to see in any retailer in any quarter. Most retailers would kill for mid-single-digits like those.
As for the bottom line, net earnings hit $1.5 billion — up from $1.4 billion last year — for earnings of $1.15 per share of Home Depot stock. EPS increased 20 cents from last year’s figure of 95 cents per share. That increase of 21.1% proves just how quickly this already-gigantic retailer keeps getting bigger.
These quarterly increases are the result of a 3.2% increase in customer transactions, a 2.3% increase in average ticket to $57.55 and a 5.8% increase in sales per square foot to $347.79.
Home Depot stock has $2.18 billion in cash, and $16.7 billion in long term debt, on which it pays an average of about 5% interest.
Home Depot Stock Will Keep Surging on Operating Cash Flow
One of the reasons Home Depot remains a juggernaut is the sheer size of free cash flow it generates. Operating cash flow for the first nine months grew about 5% from $5.9 billion to $6.3 billion. Back out about a billion in capex, and Home Depot still generated $5.25 billion in free cash flow so far this year, and Q4 is still to come.
For investors, it is critical to understand that this capex-intensive business still manages to generates this much free cash. That is money Home Depot can use to enhance and grow its business any darn way it wants to.
So the recent past for Home Depot stock was exceptional. How about the future? Management reaffirmed previous projection for 4.8% growth in FY14 sales, and 21% growth in EPS. I have no complaints.
What is contributing to Home Depot stock’s success lately?
For one, there’s a lot of housing and apartment renovation and speculation going on. Apartments in the B and C categories are being purchased and upgraded by private equity. Houses are being purchased, renovated, and rented. You know that market has hit a wave when there are IPOs like American Residential Properties (ARPI) and Silver Bay Realty Trust (SBY) allowing you to buy into portfolios of homes like this.
The housing market in general has been improving in several major geographical regions this year. Lower gas prices are going to filter into the equation soon, as people who need home improvement items actually have cash to buy them instead of using it to fill their gas tank.
All in all, Home Depot stock feels like a long-term winner. On FY14 estimates of $4.50 per share, the stock trades at a forward price-to-earnings ratio of 21. I expect 21% growth in Home Depot stock this next year, making the stock fairly valued.
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As of this writing, Lawrence Meyers was long HD. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
