Watching HD stock fall over 5% today is fascinating. Just a couple of weeks ago, HD announced that 15 stores would be closed and plans for 50 would be cancelled. As a result, HD stock rose 5%.
Today's announcement included pricing on the costs of store closures and cancellations. The total of 65 has a cost of $543 million or roughly $8 million per store. That was not new information.
Other new information was that HD earned $0.41 per share as opposed to Wall Street expectations of $0.37 per share. Such information would normally be accompanied by a rising stock price, however the improvement was due to a "calendar shift." Results would have been lower.
HD has nearly 2,000 stores with a market capitalization of $45 billion for a store value of $22.5 million per store. The actual costs of building a store (zoning, parking lot, curb cuts, store structure, etc.) appear to be roughly $20 million per store. Today's price in HD gives no value to anything other than the real estate.
So, if 15 stores are closed, the associated drop in market value would be $330 million. Additionally, if 50 stores are cancelled, the associated drop (at a 50% assumption) would be $550 million. The combined $880 million is less than 2% of a drop in HD stock value (again, assuming no value other than the real estate value).
If Mr. Market's behaviors were "rational," the market would have dropped by less than 2% earlier this month on the store closing announcement. Instead, Mr. Market was ebullient. Today's announcement of lower quarterly earnings, on the other hand, was a non-event in terms of the true value of HD. Instead, Mr. Market nosedived on the information.
No real surprise here. Mr. Market is not addressing the true value of HD stock as a company. Instead, Mr. Market is concentrating on tiny movements in the quarterly earnings and margin results, continuing to provide investors an outstanding opportunity.
If all the market were valuing is the real estate, there would be no associated drop in value when a store closed in that location. Nor would the decision not to open a store affect value except to the extent that costs incurred towards opening it are not reflected in the value of the associated real estate and have to be written off. So the market may have been paying even less attention than you supposed.
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