The Home Depot, Inc. (NYSE:HD) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.
Home Depot Inc.’s analysis versus peers uses the following peer-set: Lowe’s Companies, Inc. (NYSE:LOW), Kingfisher plc (PINK:KGFHY), Home Product Center PCL (HMPRO), Lumber Liquidators Holdings Inc (NYSE:LL), RONA Inc. (TSE:RON), Hornbach Holding AG (ETR:HBH3) and Bricorama SA (EPA:ALBRI). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-10-31 | 2012-07-31 | 2012-04-30 | 2012-01-31 | 2011-10-31 |
|---|---|---|---|---|---|
| Revenues | 18,130.0 | 20,570.0 | 17,808.0 | 16,014.0 | 17,326.0 |
| Revenue Growth % | (11.9) | 15.5 | 11.2 | (7.6) | (14.4) |
| Net Income | 947.0 | 1,532.0 | 1,035.0 | 774.0 | 934.0 |
| Net Income Growth % | (38.2) | 48.0 | 33.7 | (17.1) | (31.5) |
| Net Margin % | 5.2 | 7.4 | 5.8 | 4.8 | 5.4 |
| ROE % (Annualized) | 21.4 | 34.4 | 23.1 | 17.4 | 20.8 |
| ROA % (Annualized) | 9.1 | 14.4 | 9.9 | 7.5 | 8.9 |
Valuation Drivers
Home Depot Inc.’s current Price/Book of 5.2 is about median in its peer group. HD-US’s operating performance is higher than the median of its chosen peers (ROE of 24.2% compared to the peer median ROE of 10.9%) but the market does not seem to expect higher growth relative to peers (PE of 21.9 compared to peer median of 21.3) but simply to maintain its relatively high rates of return.
The company attempts to achieve high profit margins (currently 5.9% vs. peer median of 4.5%) through differentiated products. It currently operates with peer median asset turns of 1.7x. HD-US’s net margin is its highest relative to the last five years and compares to a low of 3.2% in 2009.
Economic Moat
The company’s revenues performance is worse than its peer median (year-on-year change revenue of 3.5%) but its earnings have been relatively good — annual earnings changed by 16.3% compared to the peer median of 3.8%, implying that relative to peers, it is focused on earnings and/or selective about what top-line growth opportunities it pursues. HD-US currently converts every 1% of change in revenue into 4.6% of change in annual reported earnings.
HD-US’s return on assets is above its peer median both in the current period (10.3% vs. peer median 5.6%) and also over the past five years (7.7% vs. peer median 5.5%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s gross margin of 34.7% is around peer median suggesting that HD-US’s operations do not benefit from any differentiating pricing advantage. However, HD-US’s pre-tax margin is more than the peer median (9.4% compared to 6.1%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
While HD-US’s revenues growth has been below the peer median in the last few years (-0.4% vs. 2.5% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 21.9. The market seems to see the company as a long-term strategic bet.
HD-US’s annualized rate of change in capital of -0.6% over the past three years is less than its peer median of 3.9%. This investment has generated a better than peer median return on capital of 11.4% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.
Earnings Quality
HD-US has reported relatively strong net income margin for the last twelve months (5.9% vs. peer median of 4.5%). This margin performance combined with relatively high accruals (2.8% vs. peer median of 1.2%) suggests possible conservative accounting and an understatement of its reported net income.
HD-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
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Disclaimer
This article was originally written by abha.dawesar, and posted on CapitalCube.
