EUR 850.00 For Business Accounts Only

Morningstar | Home Depot Reiterates 2019 Outlook on Decent First Quarter, Despite Slow Start to Spring

We don’t plan any material change to our $170 fair value estimate for wide-moat Home Depot, with the current spring selling season finally underway. With the company reaffirming its 2019 outlook for 3.3% sales and 5% comp growth underlying $10.03 in earnings per share, versus our 3.2% sales, 4.8% comp, and $10.03 EPS estimate, we have further confidence in our full-year forecast. We continue to be slightly more cautious on the top line, given the slowing cadence of existing home sales (which declined 4% in April year over year), an important driver of home improvement spend, in our opinion. Furthermore, the reduction in interest rate levels have failed to sustainably drive the home purchase decision, signaling that home improvement customers could be spending more cautiously in the category than in the recent past.

First-quarter performance was skewed due to last year’s 53-week calendar, but the company still outpaced our $2.16 EPS forecast by $0.11. Home Depot’s reported 2.5% comp was lower than the 3% we had forecast, but sales growth of 5.7%, to $26.4 billion, was well ahead of the 3.5% we modeled, contributing $0.05 of outperformance, as March and April captured mid-single-digit comps in the U.S. as weather improved. Additionally, the depreciation and amortization ratio came in about 20 basis points below our estimate, at 1.8%, accounting for another $0.03 of upside, with the remaining benefit spread across interest expense and share repurchases. Adjusting for new share count levels, we estimate the firm should be able to modestly surpass its $10.03 estimate as long as lumber deflation stalls. However, the current sales momentum doesn’t alter our long-term outlook for the business that calls for average comps of 3%, sales of 3.5%, and operating margin of 15% over the next decade given the unchanged fundamentals of the business. We continue to view shares as overvalued, trading at 19 times our 2019 estimate versus our five-year 6% EPS growth rate projection.

We don’t plan any change to our exemplary stewardship rating for Home Depot after last month’s resignation announcement from longtime CFO Carol Tome. With Richard McPhail sliding into the position Sept. 1, we expect the financials to be managed in a similar manner as in the past, given his also-lengthy tenure working under Tome (McPhail has been at Home Depot since 2005, in various finance and strategy roles). Home Depot has consistently thrown off solid ROICs, averaging 31% over the last five years, and our forecast calls for the metric to rise to more than 40% over the next five years, as current investments and strategic capital allocation pay off in a rising brand intangible asset.