Home Depot: Should You Buy Into This Rally?

Home Depot (NYSE: HD  ) , the world's largest home-improvement specialty retailer, has just announced its first-quarter results to kick off fiscal 2014's earnings and its shares have reacted by making a strong push higher. Let's break down the results and the company's outlook on the rest of the year and then take a quick glance at one of its largest suppliers, Whirlpool (NYSE: WHR  ) , to determine if we should be buying in right now or if we should wait for the stock to come back down a bit.

Source: Home Depot

The mixed first quarter
Home Depot released its first-quarter report before the market opened on May 20 and the results were mixed compared to expectations; here's a breakdown:

Metric Reported Expected
Earnings Per Share $1.00 $0.99
Revenue $19.69 billion $19.95 billion

Source: Benzinga

Home Depot's earnings per share increased 20.5% and revenue increased 2.9% compared to the first quarter of fiscal 2013; these results were driven by a 2.6% increase in global comparable-store sales, including a 3.3% increase in the United States.

Source: Home Depot

Gross profit increased 3.1% to $6.89 billion and operating profit increased 8.7% to $2.28 billion; in relation, the gross margin expanded 10 basis points to 35% and the operating margin expanded an impressive 60 basis points to 11.6%; the wider expansion in the operating margin was helped by operating expenses increasing just 0.5% for the quarter.

These strong results allowed Home Depot to repurchase approximately $1.25 billion worth of its common stock and pay $646 million in dividends during the quarter. The company noted that it intends to repurchase another $3.75 billion of its shares over the next three quarters, so this and its healthy 2.45% dividend will result in about $7.5 billion in cash returned to shareholders over the course of the year.

Overall, it was a great quarter for Home Depot and was even more impressive given the recent slowdown in the U.S. housing market. The earnings results alone likely would have sent shares higher, but the bullish sentiment heated up when the company updated its full-year guidance...

Will the growth continue for the rest of 2014?
In its report, Home Depot reaffirmed its revenue expectations and raised its earnings expectations for the full year; here's what the company now expects to accomplish:

  • Earnings per share of $4.42, up from its previous estimate of $4.38
  • Revenue increasing approximately 4.8%

The new earnings per share guidance calls for growth of 17.6% from fiscal 2013 and reflects the company's $1.25 billion in share repurchases during the first quarter and its intention to spend an additional $3.75 billion on repurchases during the year.

Source: Home Depot

Also, although it did not reaffirm this in the report, Home Depot likely continues to believe that it will achieve comparable-store sales growth of 4.8% and open seven new stores in fiscal 2014.

After the strong earnings report, it appears Home Depot is on pace to achieve all of the statistics listed above, but it will need to accelerate expansion in the second quarter since zero new stores opened up in the first quarter.

With the earnings results and outlook in hand, I believe the rally in Home Depot's stock can be sustained, because not only was it a great quarter, the stock is inexpensive based on forward estimates and Home Depot's management is clearly fully dedicated to maximizing shareholder value.

Source: Whirlpool 

Another beneficiary of the industry's growth
Whirlpool, the world-renowned appliance manufacturer and one of the largest suppliers to Home Depot, reported a strong quarter of its own back on April 25 and its shares have moved about 6% lower since then; here's a summary of the report:

Metric Reported Expected
Earnings Per Share $2.20 $2.30
Revenue $4.36 billion $4.22 billion

Source: Estimize

Whirlpool's earnings per share increased 11.7% and revenue increased 2.7% year-over-year, driven by sales increasing 4% in North America and 7.8% in Europe, the Middle East, and Africa.

Source: Whirlpool

Gross profit increased 4% to $755 million and operating profit increased 10.6% to a record $281 million. Also, the gross margin expanded 20 basis points to 17.3% and the operating margin expanded 40 basis points to 6.4%; these margins were helped by the company's ongoing cost and capacity-reduction initiatives, but were partially offset by higher costs of materials.

These results led Whirlpool to reaffirm its full-year outlook for 2014, calling for earnings per share in the range of $12-$12.50 and free cash flow generation of about $700 million. Also, the company noted that it will begin repurchasing shares in the second quarter to kick off the new $500 million share-repurchase program that it announced on April 14. 

In summary, it was a fantastic quarter for Whirlpool and its stock reacted by making a slight move higher over the next few weeks. However, it was hit with an analyst downgrade on May 12 and has fallen 6% in the days since then. I believe this decline in Whirlpool's stock is an opportunity to buy, so investors who are not sold on Home Depot should take a deeper look at it.

The bottom line
Home Depot has just reported great first-quarter results and pointed toward a strong fiscal year ahead. The stock has reacted by moving higher, but I believe this is only a drop in the bucket in terms of the returns that it could generate for the rest of the year. Investors should strongly consider buying in right now to let price appreciation and Home Depot's healthy 2.45% dividend provide significant returns over the next several years.

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