Despite earlier reported weakness from vendors in key categories like paint and appliances (Sherwin-Williams and Whirlpool both delivered weak quarters), wide-moat Home Depot (HD) bucked the trend, delivering revenue growth of 6%, a same-store sale increase of 5.5% and earnings per share that jumped 17%. Admittedly, these metrics are stellar considering we are well into a multi-year housing recovery that we expect will continue through the end of the decade but at a much slower pace than in the recent past. We think the election throws another layer of complexity into forecasting for the business, as Donald Trump's policies are likely to help U.S. domiciled businesses but hinder interest rates, potentially leading to slower housing turnover and slower growth (or possible declines) in housing prices, potentially changing the demand for home improvement longer term. We are considering these factors as offsets today and plan to maintain our $125 fair value estimate, rendering shares as fairly valued, trading at 18 times our 2017 estimate. Our main concern is that top-line growth will slow as improvement in the housing market slows, causing bottom-line growth to taper, as well.
Home Depot raised its full-year earnings outlook two pennies, to $6.33, close to our full-year outlook of $6.34. However, it maintained its full-year outlook for revenue growth of 6.3% and same-store sales of 4.9%, in line with our prior 2016 forecast, which we expect to tick up modestly with the inclusion of today’s results. Fiscal 2016 expectations imply that the fourth quarter will slow significantly, with same-store sales below 4% and top-line growth of just over 4%. However, the period will be lapping a strong fourth quarter in 2015 that produced nearly 10% top-line and 7% comp-store growth. Operating margins for 2016 should still rise around 80 basis points in our model, as expenses lever meaningfully in the final quarter of the year.
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Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.