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A Major Buyback Plan Has Home Depot Ready to Soar |
Published:
August 16,
2007
Home Depot (NYSE: HD, $33.06) is the world's leading home
improvement retailer, operating a chain of more than 2,200
superstores throughout North America. Combined, those stores
generate more than $1.5 billion in sales per week, second only
to Wal-Mart (NYSE: WMT).
Home Depot has worked diligently in recent years to overcome
perceived customer service issues, implement better inventory
management, and improve the shopping atmosphere.
While the turmoil in the housing market has made for a tough
operating environment lately, Home Depot still managed to
deliver double-digit sales growth last year -- with revenues now
fast approaching the $100 billion mark. And with capital
expenditures only taking up about 4% of those sales, the company
churned out a $4 billion mountain of free cash flow in 2006.
Over the years, management has been able to adroitly manage the
firm's growth plans, while still returning copious amounts of
cash to shareholders. From 2000 to 2005, Home Depot gave back
roughly 60% of its earnings -- spending $3 billion on dividend
payments and more than $10 billion for share repurchases. Last
year alone, the company shelled out $6.7 billion to repurchase
174 million shares. However, this pales in comparison to what is
coming in the months ahead.
In mid-June, Home Depot announced plans to sell its HD supply
business, which provides building materials and other products
to professional contractors. While this division represents
about 13% of the firm's total revenues, the divestiture will
allow management to focus on the firm's core retail operations.
More importantly, it will also yield a cash windfall of about
$10 billion.
And what better place to invest those proceeds (along with
roughly $12 billion in new debt and cash on hand) than put it
right back into Home Depot stock? The announced $22.5 billion
repurchase program will be one of the largest in history --
enough to buyback about one-third of the firm's existing shares.
When added to the $16.5 billion already spent over the past five
years, roughly 50% of Home Depot's shares will have been
repurchased since 2002.
Not surprisingly, Wall Street applauded the news, sending the
shares up nearly +5% the day following the announcement on quadruple the average
daily trading volume.
Last month, management announced that as part of its plan to
repurchase the shares as soon as possible, it was extending a
tender offer for 250 million shares -- where shareholders can
elect to sell back some or all of their shares at prices between
$39 and $44 per share.
That price has since been scaled back to a range of $37 - $42
per share, largely because the company is now expecting to rake
in a little less than previously anticipated for its HD Supply
unit -- a good indication that the borrowers have found it
tougher than expected to obtain the necessary funding given
recent tightening in the credit markets.
Nevertheless, while the company certainly has some challenges
ahead, we think this is an opportune time to establish a
position in Home Depot. The major recapitalization should put a
floor on the share price, and future repurchases (along with
improved operating performance) should help push the stock
towards our $54 fair value estimate over the next couple years.
With a little cooperation from the housing market, that could
happen sooner rather than later.Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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