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Home Depot Q3 Earnings Preview: Buy Surging HD Stock Near New Highs?

Benjamin Rains

Home Depot HD stock is up more than 22% in the past six months to easily outpace its industry’s 6% average climb and the S&P 500’s 10% expansion. The home improvement giant now rests near its 52-week highs as it prepares to release its Q3 financial results on Tuesday, November 19.

Quick Market Overview

All three major U.S. stock indexes continue to hit new records in November, with the S&P 500 now up over 4% in the last month, 22% in 2019, and 13% in the past 12 months. The recent jump comes on the back of U.S.-China trade war progress, better-than-feared quarterly earnings results, and another interest rate cut. Trade uncertainty still remains even after President Trump spoke at the Economic Club of New York Tuesday.

Nonetheless, the U.S. unemployment rate remains near 50-year lows and October’s jobs data came in far above economists’ expectations. Plus, the National Retail Federation projects strong holiday shopping season spending, which bodes well for the likes of Walmart WMT and Target TGT, and even Home Depot.

HD’s Pitch

Home Depot is not a holiday shopping mecca and unlike many retailers, its biggest revenue quarter has traditionally been the second quarter, as people kick off home improvement projects. Still, Home Depot appears to be in a strong position because of the overall strength of the average U.S. consumer.

Home Depot is the world's largest home improvement specialty retailer and boasts roughly 2,300 stores, mostly in the U.S. The Atlanta-based firm’s sales have climbed at impressive clips in recent years and it is far more immune from Amazon’s AMZN e-commerce encroachment than many others.

HD has, of course, rolled out its own digital and modern-retail initiatives. The company enables consumers to buy online and pick up in stores. And Home Depot offers free two-day delivery on thousands of eligible items and even some same-day and express delivery options.







Other Fundamentals

We can see in the chart above that Home Depot stock is up 41% in the last two years, which tops the Nonfood Retail-Wholesale Market space’s 23%. HD shares are also up 30% in the past 52 weeks. This actually lags its peer group’s 42% climb, which includes Fastenal FAST, Builders FirstSource BLDR, its main rival Lowe's LOW, and more.

Home Depot is part of our Building Products – Retail industry that rests in the top 22% of our 254 Zacks industries right now. HD also sports a “B” grade for Growth in our Style Scores system and an overall “B” VGM score. Plus the firm pays an annualized dividend of $5.44 per share right now for a yield of 2.35%, which comes in above the 10-year U.S. Treasury’s 1.91%.

The company’s valuation picture remains largely in line with where it has traded compared to its industry. And at 21.6X forward 12-months Zacks earnings estimates, it rests below its three-year high of 23.3X and not too far off its 19.9X median.

Q3 Outlook & Beyond

Home Depot’s Q3 sales are projected to pop 4.5% from the year-ago period to reach $27.48 billion, based on our current Zacks Consensus Estimate. This would easily beat Q2’s 1.8% expansion and come on top of the third quarter of 2018’s 5.1% sales growth.

Home Depot’s full-year fiscal 2019 revenue is projected to climb 2.3% to $110.71billion. Investors should note that this would mark HD’s slowest annual sales growth since 2011—with most of the last five years up between 5.5% and 7%.

Last quarter, Home Depot executives pointed to a significant decline in lumber prices and “continued lumber price deflation” for its slightly lower sales guidance. Looking further ahead, the company’s fiscal 2020 sales are expected to jump 4.1% higher.

At the bottom end of the income statement, Home Depot’s adjusted quarterly earnings are expected to climb just 0.40%. But this is coming up against a hard to compare third quarter of 2018 when earnings surged over 36%. HD’s full-year fiscal 2019 earnings are projected to pop 2.3%, with 2020 expected to come in 8% higher.

Bottom Line

Home Depot is currently a Zacks Rank #2 (Buy) as we approach its earnings release on Tuesday, November 19. Interested investors might want to wait to see how the market reacts to Walmart.

And a Home Depot pullback could be in order. In the end, though, HD appears to be a solid longer-term buy that investors might want to take a longer look at.

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