Home Depot, Inc.

NYSE:HD   3:59:59 PM EDT
337.60
+5.55 (+1.67%)
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Why Home Depot Shows Us a Frightening Economic Future



##Symbol## HD

The Home Depot, Inc. (HD)
110.12 +0.11 (0.10%)
Sector: Retailing
Published by Capital Market Laboratories on 2015-06-16

What does the rating mean?
3-Month Stock Move: -4.1%
6-Month Stock Move: +10.1%
12-Month Stock Move: +41.1%
_________
30-day Option Implied Volatility: 17.9%
Implied Stock Range: ($105.60, $114.60)
What does "implied stock" mean?


Home Depot in many ways is a bellwether, much like Federal Express. The company booms when people are feeling wealthier and it troughs when people are not. In fact, perhaps my favorite time series of all is simply looking at HD's revenue (TTM) and net income (TTM) on one chart. Note the dates on the x-axis and how they correspond with economic booms and busts.
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Now let's examine the visualizations of the critical financial measures.

We can see the rise out of the recession in 2000, the BOOM into the housing bubble, then the bust out of that same bubble. Finally, we can see the recovery from the great recession in the current portion of the chart. If you're looking for indicators of economic health, you can look to economic data, but as far as I'm concerned, HD's business is economic data, all rolled into one place. And there's one measure I will show you that points to great concern.

As for right now, HD's revenue (TTM) has risen for five consecutive quarters. One year ago the firm reported $79,375 million in revenue. For the most recent year it reported $84,380 million (a 6.31% one-year rise). Two-years ago the firm reported annual revenue of $76,070 million (up 10.92%).

Further, the average estimate for next quarter's revenue of $24,671.0 million is above last quarter's $20,891.0 million.


EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-18 $1.71 $24,671.0 M $24,703.3 M $20,891.0 M Provided by ZACKS


Here are the fundamental forces driving the five star rating. They are also the keys to watch moving forward for the entire economic system.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 84,380 79,375 76,070
Net Income (TTM US$ Millions) 6,545 5,538 4,726

Levered Free Cash Flow (TTM US$ Millions) 7,295 5,807 5,846 RISING

Capital Expenditures (TTM US$ Millions) 1,477 1,398 1,362





Stock Returns and Chart

HD is down -4.1% over the last three months and up +10.1% over the last six months. The stock price is up +41.1% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 84,38079,37576,070


Let's walk down each of these fundamental measures one at a time and note their cyclical nature to the economic landscape. Revenue (TTM) is trending higher to an all-time high.

For the most recent (annual) period the company reported $84,380 (millions) from $79,375 (millions) a year ago, or a 6.31% change. The two-year change in revenue (TTM) is $8,310 (millions) (a 10.92% change).

What do all these numbers mean?
HD's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at revenue (TTM US$ Millions) by itself in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.1411.131.12RISING


METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 6,5455,5384,726

Now we turn to the second part of that very first chart, which is net income.

Net Income (after tax profit) over the trailing twelve months (TTM) for HD is rising. For the most recent trailing-twelve-months (TTM) the company reported net income of $6,545 (million). That's an increase in the most recent year from $5,538 (million) or a 18.18% change.

Net Income (TTM) (aka annual earnings) is trending higher meaning that annual earnings have increased for (at least) five consecutive quarters. The double trend in revenue and net income is wonderful news for the economy, but it also may point to "perfection." And where does an economy go from perfection?

Let's look at net income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) 7,2955,8075,846RISING

If revenue and net income are hitting new all-time highs, so free cash flow will follow. Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For HD the metric is rising (it was $5,807 million last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM US$ Millions) of $7,295 million. That's an increase in the most recent year from $5,807 million or a 25.63% rise.

This cash metric is up $1,450 million from $5,846 million two-years ago.

For our second to last time series chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Capital Expenditures (TTM US$ Millions) 1,4771,3981,362

So revenue, net income and free cash flow are at all-time highs. Those figures look backwards (or present). One sort of "sneaky" way to examine a firm's beliefs about the future is to look at its capital expenditures (CapEx). Here's whre it gets really interesting.

CapEx(TTM US$ Millions) is trending higher meaning that for at least five consecutive quarters, it's been rising. Several consecutive increases in capital expenditures may be a sign of solid investment in the future (if costs are under control). Note the trend in the chart below.

Capital Expenditures (TTM US$ Millions) in the most recent quarter for HD was $1,477 million. CapEx is rising (5.65%) from last year's value of $1,398 million. Further, we can see that CapEx today relative to two-years ago is increasing (8.44%) from last year's value of $1,362 million.

But, check out how low HD's CapEx is relative to the past. This is the indicator that no economist will talk about and certainly will not get headline news. But this may be the most important measure of them all for a forward looking signal. The bottom line is, while HD's business is booming, it is not investing (spending) in the business anywhere near where it used to. That's caution in a time of a prolonged boom.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.


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Summary
HD can help us look at the broader economy because of its position as a leader in the do-it-yourself and professional home building and re-modelling realm. While the core fundamentals look astoundingly good, the firm is not investing in CapEx anywhere near where it used to. And this is NOT just relative to the boom in 2008. This dates back more than 15 years. Take note, a firm with great vision into the future is essentially saying, "we're not convinced."