This "look-ahead" post discusses how I came up with an estimate for Home Depot's earnings for fiscal year 2020's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before getting into the details, let's take a step back and start with background information about Home Depot.
Home Depot operates about 2300 big-box home improvement stores in the U.S., Canada, and Mexico that cater both to professionals and do-it-yourself homeowners. The COVID-19 pandemic, in some ways, benefited Home Depot as house-bound consumers started more renovation projects. However, the pandemic also led to increased labor and cleaning costs and supply chain challenges. In December 2020, Home Depot acquired HD Supply Holdings, a former subsidiary, for $8 billion. HD Supply distributes maintenance, repair and operations (MRO) products for use in multi-family and hospitality buildings.
Shares of Home Depot now trade for about $277 each, giving the company a market value of $299 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.
Revenue in the November 2020 quarter totaled $33.5 billion, 23 percent more than last year. The Building Materials business was responsible for 38 percent of overall revenue, and this unit's revenue grew by 22.3 percent compared to the year-earlier result. The Dรฉcor business contributed 33 percent of revenue, and this unit's revenue increased by 19.5 percent. The Hardlines unit supplied 29 percent of revenue, and this business's revenue rose by 29.0 percent.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Home Depot did not provide any guidance about the fourth quarter when the company reported results last November. I have had to rely on historical trends and national economic data to estimate the company's earnings.
The Census Bureau publishes data on U.S. Retail Sales, include data specific to Retail Sales: Building Materials, Garden Equipment and Supplies Dealers , which correlate fairly well to Home Depot's reported Revenue. In November 2020, the index was up 16 percent when compared to the same month in 2019. The final figures aren't yet available for December, but the advance number for the month was a stellar 22 percent than the year-earlier figure. If Home Depot's Revenue were to increase at 19 percent (i.e., halfway between 16 and 22 percent) in the fourth quarter, the figure would be 1.19*$25.8 billion = $30.7 billion. For my Revenue estimate, I'm bumping this figure up to $31.0 billion to account for one month of HD Supply's sales.
Home Depot's Gross Margin is normally very close to 34 percent of Revenue, and will probably be so again in the fourth quarter. This would translate into a Cost of Good Sold of (1-0.34)*$31.0 billion =$20.5 billion.
The Depreciation expense was $528 million in the third quarter, and I'm expecting a similar amount the fourth quarter.
In recent years, Sales, General, and Administrative (SG&A) expenses have been right around 18.7 percent of Revenue in the fourth quarter. The SG&A estimate is 0.187*$31.0 billion =$5.8 billion.
The numbers above combine to produces an estimate for Operating Income of $4.2 billion, which is 24 percent higher than the equivalent quantity in the year-earlier quarter.
For non-operating gains and losses, I've selected figures similar to those reported in the first three quarters of the fiscal year.
I assumed 24.3 percent for the effective income tax rate, which is similar to the rate in previous quarters for Home Depot.
With these figures, the estimate for Net Income (GAAP) in the quarter is $2.94 billion ($2.72 per share).
I did not make any explicit provisions for acquisition transaction or financing costs. I don't expect them to be significant.
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#homedepot #hd #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
No comments:
Post a Comment