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Home Depot (HD) Up 4.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Home Depot (HD). Shares have added about 4.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Home Depot due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Home Depot Q2 Earnings Beat, Lumber Prices Hurt Sales

Home Depot posted better-than-expected earnings results for second-quarter fiscal 2019, retaining its beat streak of more than five years. However, the company’s top line lagged estimates but improved year over year. Its earnings were fueled by significant progress on strategic investments. Further, a favorable consumer environment in the United States and steady housing market aided its results.

However, the company slashed sales and comparable sales (comps) view for fiscal 2019 on lumber price deflation and expectations of potential impacts of the newly enacted tariffs.

Q2 Highlights

Adjusted earnings of $3.17 per share grew 3.9% from $3.05 registered in the year-ago quarter. The bottom line also surpassed the Zacks Consensus Estimate of $3.08.

Net sales rose 1.2% to $30,839 million from $30,463 million in the year-ago quarter but missed the Zacks Consensus Estimate of $30,953 million. Sales benefited from robust comps performance throughout the quarter under review, partly offset by lower lumber prices. The company's overall comps grew 3% while the same grew 3.1% in the United States.

During the reported quarter, comps were aided by 1.7% rise in average ticket while customer transactions remained flat with last year. Moreover, sales per square foot rose 1.1%.

In dollar terms, gross profit inched up 0.6% to $10,432 million from $10,365 million in the year-ago quarter, primarily driven by higher sales. However, gross profit margin contracted 20 bps to 33.8%.

Operating income dipped 0.1% to $4,896 million while operating margin contracted 20 bps to 15.9%.

Balance Sheet and Cash Flow

Home Depot ended the quarter with cash and cash equivalents of $2,547 million, long-term debt (excluding current maturities) of $27,064 million, and shareholders' deficit of $1,160 million. In the first half of fiscal 2019, it generated $8,497 million of net cash from operations.

Further, the company paid out cash dividends of $2,991 million and repurchased shares worth $2,619 million in the first half of fiscal 2019.

Outlook

Home Depot notes that lumber prices have declined significantly in the past year, which should hurt sales in quarters head. Driven by the deflation in lumber prices as well as accounting for the potential impacts of the newly announced tariffs on U.S. consumers, the company lowered its sales growth guidance for fiscal 2019. Nevertheless, it reiterated the earnings view for the fiscal year, citing continued tailwinds from strategic investments, a favorable consumer backdrop and steady housing market.

The company now expects sales growth of nearly 2.3% in fiscal 2019 compared with 3.3% rise stated earlier. Comps (for the comparable 52-week period) are now anticipated to rise 4% compared with 5% growth mentioned previously. The company continues to project earnings per share of $10.03 for fiscal 2019, suggesting nearly 3.1% growth from the year-ago reported figure.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Home Depot has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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