MorningWord 5/20/15: When Good Is Not Good Enough – HD, AAPL, DIS

by Dan May 20, 2015 9:25 am • Commentary

After posting better than expected earnings and raising full year guidance yesterday, shares of The Home Depot (HD), closed down 1.74%, reversing early gains of 2%:

HD 3 day chart from Bloomberg
HD 3 day chart from Bloomberg

This was my take heading into the print from my preview from Monday:

The stock has been a poster-child for many themes in the post financial crisis here U.S. as a prime beneficiary of the FOMC’s ZIRP.  Make no mistake, the stock’s earnings multiple reflects a premium vs most other retailers, trading at almost 22x (ten year high) fiscal 2016 earnings growth of 14%, despite sales growth in the low single digits.

Yesterday’s report highlighted most of the themes I referred to, currency headwinds offset by a consumer who pays less for gas at the pump and are motivated by the rate environment to spend on their homes. Earnings growth continues to be massaged by their existing $18 billion buyback, where they bought $1.13 billion worth of stock in the quarter on their way to $4.5 billion for 2015.  I would add that the bump to full year eps at $5.25. is basically where it was prior to their guide down back on Feb 24th when consensus was $5.23 and they guided to $5.14.  Oh, and the results benefited from a favorable tax rate that was 3% lower than Q1 last year and is expected to rise 2% in the current quarter.  At 21.5x expected fiscal 2016 earnings, the stock clearly reflects the superior execution to many of its retail peers.

Things are good at The Home Depot, but not good enough to make a new all time high and keep pace with the S&P500.

While yesterday’s price action wasn’t exactly stellar, I would add that it was not too different than that of a few other widely owned companies that also seem to be dominating their competition, as Apple (AAPL), Disney (DIS) and Facebook (FB) all gave back initial gains post earnings and closed down on the day.  I suspect that despite very good headline results, investors were positioned long into the events and with sentiment at a fever pitch there were few incremental buyers was the news was out.  In some ways you could argue that this behavior is healthy and for the broad market to make a meaningful breakout it will need some of the horseman that got us here.