Why Investors Are Driving Home Depot to New Highs After Earnings

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Home Depot Inc. (NYSE: HD) reported fourth-quarter and full-year 2016 results before markets opened Tuesday. The home improvement store posted diluted net earnings per share of $1.44 in the quarter on revenues of $22.21 billion. In the same quarter last year, the company reported EPS of $1.17 and revenues of $20.98 billion. Consensus estimates had called for EPS of $1.33 and revenues of $21.79 billion.

For the full year, Home Depot posted EPS of $6.45 and revenues of $94.6 billion, compared with EPS of $5.46 and revenues of $88.52 billion in 2015. Analysts were looking for revenues of $94.18 billion and EPS of $6.35.

The company boosted its quarterly dividend from $0.69 to $0.89 per share and announced a share buyback program of $15 billion replacing its previous program.

Fourth-quarter same-store sales rose 5.8% worldwide and 6.3% in the United States. For the year, same-store sales rose 5.6% internationally and 6.2% in the United States.

The company issued sales guidance calling for growth of 4.6% year over year. Same-store sales are also forecast to rise 4.6%. Guidance for diluted EPS totals $7.13, up 10.5%, after accounting for share repurchases of approximately $5 billion.

Gross margin for 2016 increased by 6.8% and the company’s forecast calls for drop of 15 basis points in 2017 gross margin.

CEO Craig Menear said:

Our focus on providing localized and innovative product selection, improving the interconnected customer experience, and driving productivity resulted in record sales and net earnings for 2016. Our associates responded to a healthy housing market and strong customer demand, and I’d like to thank them for their execution, hard work and continued dedication to our customers.

Although Home Depot hammered estimates for the quarter and for the year, the outlook is more muted. Slower growth in same-store sales along with a projected decline in gross margin could be warning signs for investors going forward. In calendar year 2016, the company managed a total return of just 3.5% in 2016, and all of that seems to have come from a rally late in the year. The increased dividend and massive buyback program will take some of the sting out of the forecast.

Home Depot’s stock traded up about 2.1% in Tuesday’s premarket to $146.01, after posting a new 52-week high last Friday of $143.12. The stock’s 52-week low is $119.20, and the consensus price target is $149.04. The stock’s dividend yield was 1.93% at Friday’s close.