Finanzas: Home Depot: Financial Engineering At Its Best Or Worst?

Home Depot eleva el pronóstico de ganancias anuales



  • Seems shocking the amount of stock they’ve repurchased, and debt that has been issued.
  • However, the stock is up 5-fold since mid-2011.
  • Capital «returned» has exceeded free cash flow for 26 of the last 28 quarters.
  • The operating margin for HD has doubled in the last 7 years, remarkable in today’s retail environment.

Home Depot (HD), the iconic do-it-yourself home supply store, was not one of the better sales for clients, since the majority of the position was sold between $90-$100, after the announcement of the departure of Frank Blake as CEO and the subsequent ascension of Craig Menear to the same position.

That is absolutely not an indictment of Craig Menear at all, it was just at that time Home Depot had tripled off the 2011 low near $30, and some of the aspects to the financials written about today in this article had started to become apparent.

However, that hasn’t stopped the stock from trading up to $150 since.

(Run, Forrest Run!, or maybe Run Brian, Run.)


Here are the metrics that have had my attention:

Cap’l returned % of FCF L-T debt Debt % of cap’l
7/17 $12.2 bl 135% $24.4 bl 54%
4/17 $10.6 bl 118% $22.3 bl 51%
1/17 $10.3 bl 126% $22.3 bl 53%
10/16 $9.8 bl 117% $22.3 bl 51%
10/15 $9.4 bl 120% $17.8 bl 47%
10/14 $10.1 bl 153% $16.7 bl 40%
10/13 $9.6 bl 152% $14.7 bl 37%
10/12 $5.6 bl 110% $10.7 bl 26%
10/11 $4.9 bl 96% $10.7 bl 26%
10/10 $3.5 bl 106% $8.7 bl 23%

Source: Internal spreadsheet from earnings reports, 10-Q’s

Capital returned: the total dividend and share repurchases in dollars

The column that wasn’t added was «fully diluted shares outstanding» which was roughly 1.6 billion as of October 2010, and is as of last quarter roughly 1.2 billion outstanding, so Home Depot with their share repurchases, have reduced shares outstanding 25%, while their long-term debt has risen from $8.7 billion to $24.4 billion or 300%.

What happens if tax reform eliminates the deductibility of debt expense or interest expense? I know that was at least thrown around in some of the tax reform initiatives coming out of Washington.

Likely? Probably not. But it has to be thought about.

My biggest fear around Home Depot was that credit spreads would widen, the debt-for-equity swap would start to look unfavorable, and the turbo-charging of the share repurchase would start to look unattractive.

Credit spreads haven’t widened and interest rates haven’t risen.

Here is the thing though: Home Depot’s success hasn’t been all attributable to financial engineering – check this trend in HD’s operating margin using the same periods:

Operating Margin y/y chg
7/17 15.88% 38 bps
4/17 14.02% 53 bps
1/17 13.18% 103 bps
10/16 14.34% 68 bps
10/15 13.66% 133 bps
10/14 12.44% 67 bps
10/13 11.78% 131 bps
10/12 10.47% 115 bps
10/11 9.32% 60 bps
10/10 8.72% 100 bps

Source: Internal spreadsheet from earnings reports, 10-Q’s

This operating margin trend is absolutely amazing.

This is what Wal-Mart (NYSE:WMT) is missing – their operating margin trend is headed the other way.

Still, for a big-box retailer to double their operating margin in the last 7 years is in today’s retail environment truly remarkable.

Home Depot probably did it with the Pro business which is a much bigger ticket and the comps have been consistently stronger than the retail business.

Another amazing stat is that since October 2010, Home Depot has opened a total of just 38 new stores, 2,244 outstanding as of October 2010 and 2,282 today.

Analysis/conclusion: It’s hard to say what stops the HD juggernaut, although anything that widens credit spreads these days will likely slow share repurchases.

When the stock didn’t rally after last quarter’s report, there was immediate chatter that HD’s business model was «amazon-able», but you have to wonder how Amazon (NASDAQ:AMZN) will sell plywood and 2×4’s over the internet.

One client still owns the shares from November 2009 with a $25 cost basis and a 500% gain not including the dividend.

Even with its massive run up, HD still sports a 5% free cash flow yield and free cash flow covers net income better than 1.0(X) and has covered net income for the last 7 years.


Home Depot Metric
3-yr avg exp rev gro rt 5%
3-yr avg exp EPS gro rt 12%
3-yr avg P.E 19(X)
Price to cash-flow 17(X)
Price to free-cash-flow (FCF) 20(X)
Price to sales 1.9(X)
FCF yield 5%
Div % of FCF 42%
Morningstar moat rating wide

Disclosure: I am/we are long HD, AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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