Home Depot Rallies on Strong Fourth-Quarter Results

Home Depot has just released fourth-quarter results and its shares are on the rise. Let's see if we should buy into this rally.

Feb 27, 2014 at 2:00PM

Home Depot (NYSE:HD), the largest home-improvement specialty retailer in the world, has just released its fourth-quarter report for fiscal 2013. The results have caused the company's shares to rally higher and its outlook could support a continued run. Let's take a thorough look at the report and determine if we should buy right now or if we should wait for Home Depot's shares to come down before initiating positions.


Source: Home Depot

Home Depot's quarterly release
Home Depot released its fourth-quarter report before the market opened on Feb. 25 and the results were mixed compared to analyst expectations; here's a breakdown and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.73 $0.71
Revenue $17.70 billion $17.99 billion

Home Depot's earnings per share increased 7.4% and its revenue declined 3% year-over-year; however, the fourth quarter of 2012 contained an extra week so on a 13-week comparative basis, Home Depot's earnings per share increased 19.7% and revenue increased 3.9%. These were solid results, but the highlight of the report came when the company spoke of its dividend; Home Depot raised its quarterly dividend by 21% from $0.39 to $0.47, which gives the company a yield of about 2.4% at current levels. This is the fifth consecutive year that has seen a dividend increase and the 108th consecutive quarter that has seen a payment. Overall, this was a great quarter for Home Depot and its guidance for 2014 calls for more growth...

Home Depot's outlook on 2014
In the report, Home Depot also provided its outlook on fiscal 2014. Here's what the company expects to see:

  • Earnings per share of approximately $4.38, an increase of 16.5% from fiscal 2013
  • Revenue growth of approximately 4.8%
  • Comparable-store sales growth of about 4.6%
  • The opening of seven new stores
  • Share repurchases of approximately $5 billion
This is a solid set of guidance from the industry leader and it is in-line with analyst expectations. However, I believe it is conservative, especially after seeing the company's earnings increase 25.3% in fiscal 2013, but this could be a situation where Home Depot is under-promising in order to over-deliver later. With this said, I think the $5 billion in share repurchases and the dividend increase were what caused the company's shares to rise, as these are the two most bullish moves that a management team can make to take care of a company's shareholders. With everything we have seen out of Home Depot, I believe the stock can continue its rally higher and set new highs throughout the year.

Supplier strength saw this coming
Investors could have seen the better-than-expected earnings results coming from Home Depot after two of its largest suppliers, PPG (NYSE:PPG) and Whirlpool (NYSE:WHR), released very strong earnings reports of their own. Here's an overview of these suppliers and what their reports held:

PPG Industries

PPG is one of the largest manufactures of coatings and specialty materials. Several of its brands are offered in Home Depot's stores, including Glidden and Martha Stewart Living paints, Flood paint additives, and Liquid Nails construction adhesives. The company released its fourth-quarter report on Jan. 16 and it showed earnings per share increasing 44.8% to $1.81 and revenue rising 14% to $3.7 billion, resulting in the best fourth quarter in the company's history.

Screen Shot

Source: Glidden

On the company's conference call, PPG's CEO stated, "Looking ahead to 2014, we expect modest global growth to continue. We anticipate growth to remain the broadest in the U.S. economy, spanning across several coatings end-use markets as favorable market conditions continue in automotive OEM, architectural coatings and aerospace." This is a good sign for Home Depot and it gave a direct insight into the growth the coatings industry will likely see in 2014. 

Whirlpool Corporation

Whirlpool is the world's leading manufacturer of home appliances. It sells numerous products in Home Depot, including refrigerators, washers, dryers, ovens, and microwaves. It released its fourth-quarter report on Jan. 30, showing earnings-per-share growth of 29.7% to $2.97 and revenue growth of 6.2% to $5.09 billion.

Stainless Collection

The company also handed over its outlook for 2014, which called for earnings growth of 19.8%-24.8% driven by "strong industry growth from housing, replacement, and discretionary demand" in North America. Whirlpool will also be launching new products in 2014 and this will help grow demand since consumers always desire the newest and most technologically advanced products for their homes. Just like PPG's outlook on 2014, Whirlpool's outlook is bullish for Home Depot because it shows that there will be growing demand for household appliances, one of Home Depot's largest segments. I believe both PPG and Whirlpool would be great additions to any Foolish portfolio, but I still prefer the company that has both of them under one roof, Home Depot.

The Foolish bottom line
Home Depot, the American titan, has reported yet another strong quarter and its shares are on the rise. Its outlook on 2014 calls for substantial growth, so the rally will likely continue and this will allow the stock to set new highs throughout the year. In addition to price appreciation, Home Depot will return additional capital via its freshly raised 2.4% dividend and its share repurchase program. Foolish investors should strongly consider initiating positions right now and holding them for several years.

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Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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