Dec. 26, the day after Christmas, is traditionally know as "Boxing Day" in the U.K. and many former British colonies. Here in our own former British colonies, few people celebrate the holiday, but we do have some analogs of a sort.
This week, for example, is "Big Box" week, when several of the big box retailers report their earnings. Today, it's Target
What analysts say:
- Buy, sell, or waffle? 25 analysts follow Home Depot, with 15 rating the stock a buy, nine a hold, and one a sell.
- Revenues. Wall Street expects to see a 14% improvement in sales, to $21.6 billion tomorrow.
- Earnings. 18% better earnings are expected. $0.67 per share is the target.
What management says:
Certainly, the most important announcement that Home Depot has made recently was on the closing of its largest-ever acquisition: Hughes Supply. Home Depot CEO Bob Nardelli called its new acquisition "a great strategic fit, and. an important element of our growth strategy to expand our presence in the $410 billion professional market. . We plan to repeat in the professional space the same type of market transformation The Home Depot pioneered and executed in the do-it-yourself retail space."
What management does:
And just how well has Home Depot been executing? Pretty well, actually. Rolling gross margins have risen 40 basis points over the last 18 months, and by keeping costs under control (operating costs have risen only 9% over the last six months, against a 13% increase in revenues), the rolling operating margin widened further still. Don't mind the lesser increase in net margins. This owes to the lingering effects of $106 million in one-time charges recorded in the May 2005 quarter.
|
Margins % |
10/04 |
1/05 |
5/05 |
7/05 |
10/05 |
1/06 |
|---|---|---|---|---|---|---|
|
Gross |
33.1 |
33.4 |
33.6 |
33.6 |
33.6 |
33.5 |
|
Op. |
10.9 |
10.8 |
11.1 |
11.3 |
11.5 |
11.6 |
|
Net |
6.9 |
6.8 |
6.9 |
7 |
7.1 |
7.2 |
The Fool says:
Home Depot is already an $85 billion company. Whenever a company gets that big, investors can be forgiven for wondering: "How much more can it grow?" Well, let's explore that question. Just how much can Home Depot "expand" in this market serving "business-to-business customers, including home builders, professional contractors, municipalities, and maintenance professionals?"
According to Capital IQ, Hughes Supply made $5.4 billion in sales last year. In the press release, Home Depot described the deal as "more than doubling the size of Home Depot Supply" (the division that services said B2B customers.) Ballpark, let's call the new combined Home Depot Supply subsidiary a $10 billion business. $10 billion in sales comprises just 2.4% market share in the $410 billion professional market that Home Depot Supply serves.
Joe DeAngelo, executive VP for Home Depot Supply, stated in the press release that his unit aims "to grow sales to $23 billion-$28 billion . by 2010." Take him at his word and assume this is doable, doubling or tripling sales in four years -- even then the division would have only about a 7% market share. All of which suggests to this Fool that, as big as Home Depot is right now, it's got plenty of room to grow bigger still.
Competitors:
-
Watsco
(NYSE:WSO) -
WESCO
(NYSE:WCC) -
Costco
(NASDAQ:COST) -
Snap-On
(NYSE:SNA)
Home Depot and Wal-Mart are Motley Fool Inside Value recommendations, Costco is a Motley Fool Stock Advisor recommendation, and Snap-On is a Motley Fool Income Investor recommendation. Take the newsletter that best fits your investing style for a 30-day free test-drive.
Fool contributor Rich Smith does not own shares of any company named above.
