Stock In The Spotlight: The Home Depot, Inc.

Good Morning Seekers,

It is time for our weekly Stock in the Spotlight series. Today I will cover one of my favorite Dividend Growth stocks over the years, The Home Depot, Inc (HD).

Year-to-date shares of the Home Improvement giant are up 25.8%. The company has been a strong performer given the economic circumstances.

The home improvement sector has been riding the wave of consumers stuck at home combined with a strong housing market. Many consumers being at home have had more time to think about those improvements they have put off.

The low interest rate environment has fueled the housing sector leading to strong sales, which tends to boost home improvement projects as well. The company’s recent results are proof the sector is booming.

Here is a look at the company’s Q2 Earnings/

HD Q2 Earnings

This was a blowout quarter for HD that backed up the surge in the stock price we have seen since the March lows.

The company grew revenues by 23.4% and expanded gross margins at the same time. While growing top line sales, the company was also able to expand operating income and margin by 23.9% and 10bps, respectively.

Customer transactions increased 12% due to more consumers being at home, which also led to same-store sales of 23.4%.

Looking Ahead

These are incredible numbers, but not numbers that can be expected on a regular basis. With the housing market continuing to roll on and the Fed expected to keep interest rates low, home improvement projects are bound to continue.

Existing homes sales continue to be strong. At the end of July, existing home sales jumped nearly 25% and are expected to continue growing.

This will continue to boost home improvement projects in the near term. Inventory is low and home prices are at peak levels, more and more homeowners will choose to improve there current homes over moving.

The likes of HD and LOW also tend to perform well during Hurricane season as well, and the midwest was just hit with two large storms and more likely to come through.

Valuation

HD is difficult to value using current numbers because 23% same-store sales is just not realistic looking further out. I do expect a few more ultra strong quarters, but it will taper off closer to normal growth after that.

HD currently trades at a P/E multiple of 25.2x. The company’s 5-year avg P/E has been 22.4x.

In terms of Price to Sales, HD currently trades at a multiple of 2.5x compared to their 5-year avg of 2.0x.

HD has been a strong dividend growth stock for years now, showing the ability to be a total return stock. The company has grown substantially over the years all while growing their dividend nearly 25% per year over the past 5 years.

The company currently pays an annual dividend of $6.00 which yields 2.2%. Over the course of the past 5-years, HD has sported a dividend yield of 2.1%.

Looking at all of these metrics mentioned above, they all point to shares being overvalued.

The company’s chart was also flashing overbought as the company was trending well above all moving averages, RSI reached 83 a few weeks back, but since then, the stock has been trading sideways. Today we saw a sizable pullback below recent support and below 20 day EMA.

The next support level is around $264, and with another day like we had yesterday, we could see shares testing these levels.

Again, this is my opinion and you should perform your own due diligence and contact a financial advisor before making any investments.