‘fears of higher rates are largely overblown’

Home Depot Inc (NYSE: HD) on Tuesday reported market-beating results for its fiscal Q4 and announced a 15% increase in dividend. Shares are still down 3.0% this morning.

Q4 financial highlights

• Net income printed at $3.35 billion versus last year’s $2.86 billion.
• Home Depot earned $3.21 per share; an increase from $2.65 per share in Q4 of fiscal 2020.
• Sales were up 10.7% YoY to $35.72 billion in the recent quarter, as per the earnings press release.
• FactSet consensus was for $3.18 of EPS on $34.88 billion in sales.
• Cost of sales jumped 11.3% resulting in a hit to gross margin from 33.6% to 33.2%.
• Comparable sales went up 8.1% in Q4 – well ahead of experts’ forecast.

Dividend hike

Home Depot also hiked its quarterly dividend on Tuesday to $1.90 per share. Commenting on the earnings report, Oppenheimer’s Brian Nagel said on CNBC’s “Squawk Box”:

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The results are extraordinarily solid. The business has gotten stronger over the last three quarters. Despite challenges, Home Depot continues to strengthen. It’s a very solid report from Home Depot.

Full-year guidance

For fiscal 2022, Home Depot forecasts a slight increase in both sales and comparable sales. Its estimate for EPS is for low-single-digit percentage growth. This compares to analysts at 4.6% increase in EPS, 2.2% in same-store sales, and 1.6% growth in overall sales. Nagel added:

Home Depot hasn’t been giving guidance for a while. They did today. That’s a testament of their understanding of their own business. They’re basically saying the underlying trends of the last couple quarters will persist in 2022. Again, that shows how strong Home Depot is performing.

Home Depot was a pandemic beneficiary as it was deemed essential and stayed open during the COVID-19 restrictions. As people were spending a lot more time at home, naturally, the demand for home improvement projects noted a sharp increase.

What’s interesting about Home Depot’s Q4 results, therefore, is that it’s a confirmation that the retailer is seeing sustained demand even as the pandemic is subsiding.

Why has the stock sell-off in 2022?

The stock is still down a little under 20% for the year, which Nagel attributes to the fear of rate hikes. He noted:

The recent decline in Home Depot stock is related to fear of higher rates. But look at the past three Fed tightening cycles. In early maybe mid stages of these tightening cycles, Home Depot continues to perform quite well. So, I think the fears of higher rates for Home Depot are largely overblown.