Home improvement retailer Home Depot (HD - Free Analyst Report) operated about 2,250 “warehouse” style stores in the U.S., Canada, China, and Mexico (as of August 1, 2010). A typical store is about 105,000 square feet of indoor space, plus about 24,000 square feet of outdoor garden center space, and stocks about 35,000 items. Stores carry building materials, such as lumber, floor and wall coverings, home systems components, such as plumbing, heating, electrical materials, and paint and furniture. Readers of Value Line reports can find all of this information and more in the Business Description. (A free copy of Home Depot’s Value Line report is available here for use with this article.)
A quick examination of Home Depot’s Price Chart shows that the company’s stock price fell in tandem with the housing market, beginning in 2007. Indeed, the stock price fell nearly 60% from its 2007 high of $42 a share to its 2008 low of $17 a share (the highs and lows for the year can be found along the top of the Price Chart). Home Depot’s price recovered from its 2008 lows during 2009 and into the following year, before faltering again in mid-2010.
Readers looking to dig deeper into Home Depot’s decline and recovery need look no further than the Statistical Array. Starting in 2006, the company’s numbers started to decline. Although sales increased through 2006, gross, operating and net profit margins all fell that year, resulting in a small profit decline (earnings per share nevertheless rose due to considerable share buybacks). This signals that either operational management quality declined, raw materials costs increased, the company grew too quickly, or some combination of some or all of these.
Home Depot’s problems continued into 2007 and 2008, as margins compressed at an accelerating rate, with operating margins bottoming out at 8.6% in 2008, a 35% decline versus its 2005 high. In that time period, the company’s profits nearly halved, from $5.84 billion to $2.98 billion. As a result of this three-year swoon, the company’s five-year earnings, sales, “cash flow”, and book value growth rates (found in the Annual Rates box on the left side of the page) have been anemic. Readers can also view the company’s sales and share net decline in the Quarterly Sales and Earnings boxes on the bottom left of the page. Accounting for seasonality, the company experienced deteriorating quarterly comparisons for seven consecutive quarters beginning in the April period of fiscal 2007.
Similarly, readers can account for Home Depot’s stock price recovery by examining the same sections of the Value Line page. In 2009, the number of stores fell for the first time since at least 2000, indicating an emphasis on cutting costs. Accordingly, the operating margin that year rose back above 10%. Year-over-year share net comparisons turned positive in the January period of fiscal 2009.
Examining the Estimates portion of the Array and the Analyst Commentary shows that the trends evident in the Historical portion of the Array are likely to continue. The analyst credits “cost controls, better supply-chain management, and a scaled back expansion strategy” with enabling the company to achieve positive year-over-year share-net growth. Indeed, the analyst’s estimates of the number of stores in 2010 and 2011 are 2,250 and 2,265, respectively, which would be a modest rate of expansion compared to the company’s rapid growth during the last decade. The analyst forecasts that this, combined with cost controls, will result in widening margins in 2010 and 2011.
Just because Home Depot seems to have returned to earnings growth does not make its stock a good buy, as can be seen from HD’s summer swoon on the Price Chart. The stock only garners an Average (3) score for Timeliness, which can be found in the Ranks box at the upper left corner of the page. The analyst, however, comments that the stock is “a good selection for conservative accounts” and has reasonably attractive 3- to 5-year total return potential “on a risk adjusted basis.” Indeed, the stock carries Value Line’s Highest rank for Safety (1) and is less volatile than the market average, as measured by its Beta coefficient (both can be found in the Ranks box).
A peek at the Ratings box (at the bottom right of the page) confirms Home Depot’s status as a so-called safe stock with average year-ahead price performance potential. The company has Value Line’s highest Financial Strength score (A++), and garners high marks for Stock Price Stability and Earnings Predictability, but a relatively low score for Price Growth Persistence.
Information in the Capital Structure box illustrates why Home Depot is such a strong company financially. Long-term debt constitutes only 28% of capital, and interest, both long-term and otherwise, are well-covered.
Finally, HD returns to its investors a healthy dividend of $0.95 a share (annualized). Taking into account expected dividend increases next year, the stock, at the recent price, has a 3.2% dividend yield (both recent price and yield can be found in the Top Label section, running along the top of the page). As the analyst notes in his Commentary, the stock’s Price-to-Earnings (P/E) Ratio (found in the Top Label) is reasonable and near its long-term average. This can be confirmed by comparing the current P/E to prior years’ average annual P/E ratio in the historical section of the Statistical Array.
In short, a reader can deduce from looking at the Value Line page that Home Depot stock, while unlikely to generate spectacular price appreciation, should safely preserve capital, while returning a reasonable yield.
At the time of this article’s writing, the author did not have any positions in the companies mentioned.