Is Home Depot a Sell?

Home Depot (HD) announced second quarter ended July 31, 2016 net sales of $26.5 billion, up 6.6 percent year-over-year from $24.8 billion during the same period last year. Going forward, the company estimates complete fiscal year 2016 sales to grow about 6.3 percent while comp sales is estimated to increase nearly 4.9 percent.

The Home Depot declared second quarter of 2016 net earnings of $2.4 billion or $1.97 per diluted share, up 9 percent year-over-year from $2.2 billion or $1.73 per diluted share in second quarter of 2015.
Moving ahead, the company estimates 2016 diluted earnings per share to expand nearly 15.6 percent to $6.31 over last fiscal year.

The global home improvement retailer reported continued year-over-year top and bottom line expansion primarily driven by the ongoing notable improvement in international housing demand due to steady growth in worldwide macroeconomic environment.

Positives to consider

Home Depot is observed to be having industry-leading consolidated shareholder returns compared to S&P retail composite and S&P 500 indices since last five years starting fiscal year 2011.

Going forward, Home Depot estimates to expand total sales to about $101 billion, achieve operating margin of 14.5 percent and a net return of 35 percent on the capital invested by the conclusion of fiscal year 2018.

The industry-leading stock performance for Home Depot highlights robustness of the company’s key growth strategies being supported by the steadily improving global macroeconomic environment that is driving healthy home demand.
Is Home Depot a Sell?
Image by stevepb / Pixabay
Further, the company seems extremely positive about this strong consumer home demand to continue which would deliver sustainable long-term company growth while offering attractive shareholder returns.

Home Depot reported excellent quarterly earnings, better than the key analyst’s expectations primarily driven by significant benefits being gained by the global home improvement retailer amid consistent and significant improvement in the international housing market demand with the company having operated a net of 2,275 retail stores all through 50 states including, Mexico, 10 Canadian provinces, Guam, U.S. Virgin Islands, Puerto Rico and the District of Columbia.

Concerns to watch

According to a latest report by UBS on Global Real Estate Bubble Index, there’s a significant risk of a real estate bubble developing in the major international cities such as London and Hong Kong with the key benchmark indices such as price-to-rent and price-to-income ratios both having achieved the topmost level of all time.

As per the report, housing prices are currently driven greatly by international and local investment demand instead of local household income. For example, the workers in Hong Kong who earn double the average city’s income are facing significant problem in purchasing a small portion of land due to extremely high prices in the city that are primarily driven by the investment demand. However, if this demand withdraws then the risk about the housing bubble rupture would grow notably.

The global housing market bubble burst seems to be an acute problem for the key homebuilders such as Home Depot over the longer term that is observed to be benefiting from the near-term surge in the global housing demand.

Conclusion

Overall, the investors are advised to “Hold” their position in The Home Depot, Inc. considering the steady improvement in the global housing market demand but, weak company financial position with significant total debt of $20.94 billion against weaker total cash position of $4.02 billion only, restricting the company to make future growth investments. The profit margin of 8.08% seems satisfactory. The PEG ratio of 1.53 depicts healthy company growth.
Published on Aug 31, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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