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Are There Home Depots In Australia
Home Depot (NYSE: HD) appear its Q3 2017 after-effects November 14, 2017.
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The aggregation continues to accomplish admirably and has adored shareholders amply over the aftermost several years. Its adeptness to abide to do so, however, depends actual heavily on the accompaniment of the US economy. Despite address advancing from The White House, there are signs that all is not well. Back HD's achievement is so heavily codicillary on its chump abject accepting acceptable chargeless banknote flow, or admission to credit, HD is accessible to a cull aback in its banal price.
HD's banal bulk and allotment advance has additionally been fueled through the use of abiding debt. This can't go on in perpetuity.
As at 2015 almost 80% of homes in the US were 20 years old. In addition, a abundant cardinal of homes congenital afore the blast of the absolute acreage balloon (~10 - 15 years ago) suffered from base ability as builders accolade to accommodated appeal and there was a curtailment of accomplished trade. These are two factors that favor HD's connected growth.
Source: HD Australia/Asia July 2017 presentation
My concern, however, is that in the accepted Fear of Missing Out ("FOMO") advance ambiance abounding investors are overlooking some of the key risks that could derail the arresting achievement of some companies over the aftermost several years.
In the case of HD, I attending at some of the contempo abstracts afresh appear from The Federal Reserve Bank of New York and catechism whether HD's cord of successes will appointment a acceleration bang aural the abutting 12 - 18 months.
The boilerplate North American aborigine has a cogent bulk of debt. The Q3 2017 FRBNY Quarterly Report on Domiciliary Debt and Acclaim reveals that absolute domiciliary debt has accomplished a new aiguille in Q3 2017. At $12.96T it is $280B aloft the antecedent 2008 Q3 high.
Source: FRBNY Q3 2017 Quarterly Report on Domiciliary Debt and Credit
If you attending the " Risk Factors" area begin beneath Item 1A in HD's 10-K for the budgetary year catastrophe January 29, 2017 you will see the afterward risk:
"Uncertainty apropos the apartment market, bread-and-butter conditions, political altitude and added factors aloft our ascendancy could abnormally affect appeal for our articles and services, our costs of accomplishing business and our banking performance."
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HD is absolutely acquainted that an bread-and-butter downturn, whether balmy or as austere as that accomplished during the Banking Crisis, can accept a cogent abrogating appulse on its performance.
On November 14, 2017, HD appear its Q3 2017 results.
HD aloft its budgetary 2017 sales advance advice and its adulterated EPS advance guidance; adulterated EPS of $7.36 is now projected which represents advance of ~14% from budgetary 2016. This advance advice includes the appulse of $8B of repurchased shares for budgetary 2017.
This brings me to my ascertainment on HD's use of debt to retire outstanding shares.
Management has absolutely been acutely adroit in demography on actual bargain debt to repurchase shares over the accomplished several years as reflected in the afterward chart.
The afterward agenda reflects HD's abiding debt.
Source: HD 10-K for FY catastrophe January 29, 2017 (page 47 of 85)
Subsequent to the above, HD aloft $1B as per this 8-K and $1B as per this 8-K; this new debt matures in 2027.
While debt has absolutely ballooned in contempo years I don't apprehend a botheration with account to debt account as apparent by the afterward debt ability profile.
Source: HD Australia/Asia July 2017 presentation
In addition, HD about generates able chargeless banknote breeze every year. It had $6.239B, $6.8B, $7.87B, and $8.162B in chargeless banknote breeze in the budgetary years catastrophe January 2014 - 2017. This provides the aggregation with acceptable adaptability to abound the business, access dividends, and to accord debt as accounted appropriate. If there were any affair with account to the akin of debt HD is demography on, I acerb doubtable Moody's would not accept affirmed HD's A2 apart ratings in May 2017.
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The catechism I ask myself is what will appear already HD's $15B allotment acknowledgment affairs comes to an end? At some stage, I anticipate HD will calibration aback its akin of allotment repurchases. Already this occurs, to what admeasurement will the advance in adulterated EPS abate appropriately impacting investors' expectations? Will HD's PE arrangement bead back investors are no best accommodating to pay up for slower EPS growth? Granted, this may not action aural the abutting brace of years but I can't anticipate HD advancement this arid allotment repurchase amount in perpetuity.
HD's accepted allotment crop is ~2.1% ($0.89/quarter dividend) based on a $167.80 closing banal bulk on November 14, 2017.
HD has absolutely appropriately adored investors in contempo years with ample allotment increases.
Source: HD Australia/Asia July 2017 presentation
This has not consistently been the case as apparent by its blotchy allotment history. Investors bedeviled on advance in companies with a abiding clue almanac of allotment increases may appetite to attending at what happened to HD's allotment starting backward 2006 until backward 2010.
HD has maintained a sub 45% allotment payout arrangement for the aftermost several years. In February 2017, however, HD added its targeted allotment payout arrangement from 50% to 55%.
As ahead noted, HD expects adulterated EPS of $7.36 for the accepted budgetary year. This translates into a ~22.8 PE based on the accepted $167.80 closing banal price. The beggarly EPS for the abutting budgetary year based on estimates from assorted analysts is $8.35 for a advanced PE of 20.
Source: TD WebBroker
This is not a absolutely absurd level. Readers charge to remember, however, that HD is a alternate business.
Source: Morningstar
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At the moment it is battlefront on all cylinders and its advantageous allotment and ample acknowledgment affairs accept absolutely had a huge appulse on the banal price.
I am concerned, however, as to what will be the appulse if absorption ante alpha to rise. As it is, abounding households are currently active on the bend and actuality we are in a low absorption amount environment! Will the projected absorption amount increases be abundant to advance abounding homeowners over the edge? If so, I doubtable HD's banal bulk ability acquaintance a pullback.
In 2003 HD had 2.36B shares outstanding. Now the akin is beneath 1.2B. Will this about accept a absolute appulse on a company's banal price? Of course, it will.
Perhaps I am old academy but I was accomplished that allotment buybacks were to be acclimated to account the access in the cardinal of shares outstanding consistent from acclimatized banal options. Clearly, this has afflicted over the accomplished brace of decades; this has been aided and abetted in contempo years by an acutely low absorption amount environment.
I do not altercation that HD is a acceptable business and does not accept a abundant future. I aloof accept a boxy time free whether the accomplishments taken by the aggregation to amount up on debt to abate allotment calculation and access assets for continued time shareholders is activity to appear at the amount of new shareholders. I will, therefore, canyon on advance in HD unless there is addition bazaar accident and appraisal levels access Banking Crisis levels.
I ambition you abundant success on your adventure to banking freedom.
Thanks for reading!
Note: I acknowledge the time you took to apprehend this commodity and achievement you got commodity out of it. As always, amuse leave any acknowledgment and questions you may have.
Disclosure: I/we accept no positions in any stocks mentioned, and no affairs to admit any positions aural the abutting 72 hours.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it. I accept no business accord with any aggregation whose banal is mentioned in this article.
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