Investors cheered Home Depot’s (HD) Q4 results reported yesterday morning. Despite issuing guidance that was below consensus the stock rallied 4% to new all time highs. I do think it is important to note that when the company reported Q3 results on November 18th that they mildly guided down the quarter just reported, and it appears they continue to actively manage to double digit earnings growth despite only registering low single digit sales growth. The company guided current year earnings per share to $5.14 a share, below the consensus of $5.23 (a rounding error), but that is after the company retires about $4.5 billion worth of shares. HD has been active in balance sheet management resulting in in earnings growth well above the S&P 500 average. In late 2013, the company got even more aggressive in their share buybacks, accelerating to the tune of $3 billion in December 2013 and then again in early June the company issued $2 billion in debt to buy back even more stock.
But here is the thing, the current year guidance suggests a fairly large earnings growth deceleration (22% to 14%), and as stated above that includes retiring 3% of their shares outstanding, less obviously if the stock continues to move higher. At any point last year one could have made an argument that the extent of the buybacks is getting precarious as the stock makes new all time highs on a daily basis. But I guess if you were to make that argument here you could add the potential for the company’s largest expected year over year earnings deceleration since 2010. I would also add that despite what appears to be tailwinds for U.S. retailers like HD who get almost 90% of their sales from the U.S. valuations are getting a bit stretched, trading at 25x trailing earnings and 22x forward earnings estimates, both at 10 year highs, per Bloomberg:
So, the highlight in HD’s results was their continued commitment to capital return:
The board of directors also authorized an $18.0 billion share repurchase program, replacing its previous authorization. Since 2002 and through February 1, 2015, the Company has returned more than $53 billion of cash to shareholders through repurchases, repurchasing approximately 1.2 billion shares.
So what is the point of this post?? I suspect that you may be disappointed to hear that I do not believe that U.S. equities are in a bubble, but I do believe there is a troubling concentration of bubbly sentiment in a handful of mega cap stocks like Apple, Disney and The Home Depot. I suspect this is all fine and good as long as the Fed keeps ZIRP in place, but in my mind, the greater focus and investment concentration on a such a small group of stock creates the potential for an exaggerated reaction to unexpected stock specific news.
With HD, the guidance that includes the expected buybacks is not a take it to the bank situation. If rates were to rise and the housing market stall HD could see a more substantial slowdown in growth, calling into question the stock’s 10 year high earnings multiple. The stock is up nearly 60% from the 52 week lows, I think it is safe to say it may discount a good bit of news.
My point is simple. Very few people are attempting to poke holes in the most beloved stories in the market as long as the Fed put is in place. But I am happy to do so because people should know what happens when the music stops.