Home Depot Inc: Earnings Will Make HD Stock a Market-Beater

Expect strong results that push HD stock to record levels and beyond

Shares in Home Depot Inc (NYSE:HD) are not far removed from a recent all-time high and Tuesday’s earnings report will probably put HD stock over the top once again.

Home Depot Inc: Earnings Will Make HD Stock a Market-BeaterAfter all, earnings beats are just what Home Depot does. Profit has eclipsed Wall Street estimates for six consecutive quarters, while the top line surprised to the upside in seven of the last eight quarters.

In a rational world, better-than-expected earnings shouldn’t move the share price. They’re backward looking. But they usually do.

And as long as the outlook plays along, HD stock has a chance of closing the performance gap vs. the S&P 500 Index before year-end. Shares in Home Depot are up 4% for the year-to-date vs. a gain of more than 7% for the broader market.

That underperformance should be somewhat irritating to shareholders. After all, Home Depot is benefiting from economic trends. And unlike most retailers, it has little to fear from Amazon.com, Inc. (NASDAQ:AMZN).

HD sales are getting a lift in a number of ways, from low unemployment and steady job growth to higher wages and cheaper gas. That’s prompted an increase in new housing formation and turnover, as well as home improvement projects. At the same time, even if they were available it wouldn’t be practical to buy construction materials from Amazon Prime.

Second Time a Charm for HD Stock

Sure enough, those tailwinds helped HD book strong first-quarter sales. Revenue rose 9% the last time Home Depot reported earnings. Same-store sales — an important retail metric — grew 6.5%

It’s reasonable to expect more of the same — or better — in the second-quarter. Analysts on average expect Home Depot to report earnings of $1.97 a share, up from $1.71 a year ago, according to a survey by Thomson Reuters. Revenue is forecast to rise 7% to $26.5 billion.

At the same time, sentiment remains strong. Of the 31 analysts covering the stock, 23 call it a “buy” and eight have it at “hold.” Their median target price of $150 a share implies upside of 9%. Furthermore, on a forward earnings basis, shares are trading at a premium to their own five-year average.

HD stock is also increasingly attractive because home improvement is rare bright spot as the wider retail industry struggles. For the seven months ended July, retail and food services sales rose 2.8% year-over-year. But the home improvement category? It grew 6.4%.

With so few options in the sector, retail investors can’t ignore Home Depot when looking at allocations. The dividend yield of 2% helps too.

HD stock might be trailing the broader market so far this year, but since late June it’s up more than 10%. If earnings once again beat the Street, Home Depot stands a good chance of becoming a market-beater from here on out.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/home-depot-stock-hd-earnings-nyse/.

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