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Home Depot (HD) Up 7.1% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for The Home Depot, Inc. HD. Shares have added about 7.1% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is HD 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 drivers.

Home Depot's Q1 Earnings Beat Estimates, Sales Lag

Home Depot reported solid earnings growth in first-quarter fiscal 2018, continuing with its five-year-long trend of beating earnings estimates. However, sales missed estimates after a positive surprise in the preceding six quarters.

The company posted fiscal first-quarter adjusted earnings of $2.08 per share, which escalated 24.6% from $1.67 recorded in the year-ago quarter. The figure also beat the Zacks Consensus Estimate of $2.06.

Results gained from strength in the company’s core business despite a slow start to spring season. The company’s relentless focus on affording innovative products, boosting interconnected customer experience and driving productivity seems to be paying off. Further, the company continued to reap benefits of a steady housing-market recovery and strong customer demand.

Quarterly Details

Net sales grew 4.4% to $24,947 million from $23,887 million in the year-ago quarter. However, the top line lagged the Zacks Consensus Estimate of $25,202 million. The company's overall comparable-store sales (comps) increased 4.2% while comps in the United States grew 3.9%.

During the reported quarter, comps benefited from 5.8% increase in average ticket, offset by 1.3% decline in customer transactions. Moreover, sales per square-feet rose 4.5%.

Gross profit margin expanded 40 basis points (bps) to 34.5%. In dollar terms, gross profit improved 5.7% to $8,617 million from $8,154 million in the year-ago quarter, primarily driven by higher sales.

Operating income increased 1% to $3,381 million while operating margin contracted 40 bps from the year-ago quarter to 13.6%.

Balance Sheet and Cash Flow

Home Depot ended first-quarter fiscal 2018 with cash and cash equivalents of $3,599 million, long-term debt (excluding current maturities) of $24,244 million and shareholders' equity of $1,687 million. In the fiscal first quarter, the company generated $3,981 million of net cash from operations.

Outlook

Going into the fiscal second quarter, the company continues to witness strength in all lines of business in the first few weeks of May. This robust momentum, along with a favorable housing market and macroeconomic backdrop, led the company to retain its earnings and sales forecast for fiscal 2018.

Including the impacts of the adoption of ASU No. 2014-09, which pertains to revenue recognition, Home Depot expects sales growth of nearly 6.7% in fiscal 2018, accompanied by 5% increase in comps. Further, the company estimates earnings per share for fiscal 2018 to be up nearly 28% to $9.31.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared with four lower.

The Home Depot, Inc. Price and Consensus

 

The Home Depot, Inc. Price and Consensus | The Home Depot, Inc. Quote

VGM Scores

At this time, HD has a nice Growth Score of B and a grade with the same score on the momentum front. The stock was allocated a grade of B on the value side, putting it in the second quintile 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.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, HD has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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