Home Depot Stock Rising After Earnings, But Watch for Valuation Headwind

There's no denying HD stock is a bright spot among retailers right now

With the stock of Macy’s (M), Nordstrom (JWN) and other big-name retailers taking sizable hits last week following disappointing third-quarter earnings, it would be easy to assume the average U.S. consumer has already (at least mentally) started their own recession.

Home Depot Stock Rising After Earnings, But Watch for Valuation HeadwindAfter a look at the Q3 numbers reported by Home Depot (HD) on Tuesday morning, though, rumors of retailing’s death may be premature.

Home Depot stock — already in a long-term uptrend — is up firmly after the home-improvement store chain handily topped earnings estimates for the prior quarter, and better still, the company upped its full-year outlook.

Not only does it bode well for peer and rival Lowe’s (LOW), which reports its third-quarter numbers on Wednesday, but it suggests consumers can and will spend generously if it’s the right product marketed in the right way.

Home Depot Earnings

Last quarter, home improvement store operator Home Depot earned $1.35 per share on $21.8 billion in sales.

Both were better than the year-ago figures, and though the top line “merely” met estimates, the bottom line was better than analysts had anticipated. Specifically, in the same quarter a year earlier, the company earned $1.15 per share of HD stock on revenue of $20.52 billion, and this time around, the pros were looking for a bottom line of $1.32 per share of Home Depot stock and sales of just a bit less than $21.8 billion. That’s a 6.4% improvement in the company’s top line, and a 17.4% increase in the bottom line per share of HD stock.

In light of those numbers, it comes as no real surprise same-store sales grew 5.1%, handily topping estimates for an improvement of 4.6% on that front.

The company said it saw progress in all major product categories, with CEO Craig Menear saying of last quarter’s numbers, “During the quarter, we saw broad-based growth across our geographies and product categories, led by growth in transactions from both our DIY and Pro customers.”

Makes Sense

In retrospect, the strong numbers from the home improvement retailer can’t be entirely surprising. Analysts knew coming out of the August-through-October period that retail spending on houses, home improvement and appliances was up explicitly at the expense of apparel … a premise underscored by weak third-quarter numbers from the aforementioned Macy’s and Nordstrom’s.

Continued gains in home values and sustained (albeit erratic) bigger-picture growth in homebuilding activity underscore this idea. September’s housing starts reached an annualized rate of more than 1.2 million, which was the second-best reading of the past seven years. Although permits edged slightly lower [as they broadly should headed into winter], even at September’s pace of 1.1 million they’re still trending higher from 2009’s lull.

Indeed, even with the seasonal slowdown in homebuilding permits, the Homebuilder Confidence Index nearly reached a 10-year high in October, suggesting the growth presently underway within the housing and construction market can be sustained, in turn suggesting the ongoing advance of the Home Depot stock price can do the same.

Looking Ahead for Home Depot Stock

In light of the ongoing trends within the housing market as well as Home Depot’s proven ability to capitalize on it, the company upped its full-year earnings and revenue outlook. Now Home Depot is expecting sales to improve by 5.7% in 2015, and earnings are projected to grow by 14%, to $5.36 per share of Home Depot stock. Analysts has been expecting a profit of $5.31 per share of HD stock, and looking for total sales growth of 5.5% this year.

While the trailing results are impressive and the strong forward-looking numbers are plausible — even likely — the current Home Depot stock price of $125 isn’t exactly a bargain-basement number. The trailing price-to-earnings ratio of 24.5 and forward-looking P/E of 20.5 are pushing their limit relative to the retailer’s growth pace. Any position should still be watched closely.

As was noted, Home Depot rival Lowe’s is slated to report its third-quarter numbers on Wednesday, before the market opens. Analysts are now collectively looking for a profit of 78 cents per share versus a bottom line of 59 cents per share of LOW booked in the same quarter a year earlier. Sales should grow 4.6% for the third quarter, to $14.31 billion.

As of the latest look, earnings for Lowes are expected to grow 21% for the fiscal year ending in January.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/home-depot-stock-rising-earnings-watch-valuation-headwind/.

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