Home Depot: Great Quarter But Does Upside Remain?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Home Depot’s (NYSE: HD) earnings announcement was nothing if not spectacular. Yeah, they beat analyst expectations but even more importantly the company obliterated sales, margins and earnings vs. Q4 of 2010. The result was pre-market trading ended with a 3% jump in share price. And then something interesting happened on the way to the party, investors grabbed their 1.5% or 2% and got out. Hmm.
HD remains in positive territory with a more than respectable increase in share price, but methinks there may be something else behind the pre-market activity and what’s happened since.
First, The Numbers
Home Depot pulled the ultimate earnings call trifecta – it’s not difficult to imagine the results of higher sales and margins in the same quarter, and the increased earnings you’d expect were certainly there. The $16.01 billion in sales for the quarter was a nearly 6% increase year-over-year; nice. Add in the slightly improved margins -- and with that sales volume every little bit helps – and you’re left with $774 million in profit. That compares to a “mere” $587 million in Q4 of 2010. Some quick math and you’re left with a jump of nearly a third quarter-over-quarter.
Now What?
Based on those results and the company’s guidance of a 4% sales increase in 2012 the pre-market activity makes sense. So why the sell-off from earlier highs?
Though investors in HD must still feel a little giddy there should be some question – and perhaps that would explain the easing – whether share prices much should be much higher than the current $47 and a half (give or take)? At a 20+ multiple based on trailing earnings and 17+ based on estimates for 2012 it could be successfully argued that other than another point or two, HD is trading right about where it should be. No doubt current levels make sense but the question remains if getting in now will provide much in the way of upside.
Or perhaps Lowes would be a better option for those betting on the resurgence in building and consumer spending in 2012. Lowe's (NYSE: LOW) is currently trading at exactly the same valuations as HD. Whether that’s appropriate is likely, but will be either confirmed or denied during next week’s earnings call. The company certainly needs to improve over last quarter’s revenues from Q2 which were essentially flat year-over-year.
There is one slight difference between the two – other than sheer size – forward estimates look a little better for LOW than for HD, but not much. That will change of course – good or bad -- next week.
Where does that leave us? For current HD shareholders there’s no reason to run for the hills and there’s nothing wrong with a 2.45% dividend yield. The company will break through the 52-week high set earlier today -- the problem for new investors is they’re not likely to move much from there. And the same applies to Lowes. If LOW reports significant numbers there’ll be a quick pop, just as with HD. But again just how much higher is warranted, for either company? Not enough.
Hold ‘em if you got ‘em and enjoy your dividend. If you don’t, you’ll do better keeping it that way.
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