Home Depot Inc (NYSE:HD) matched Wall Street’s profit estimate in the most recent quarter thanks to continued strength in the housing market. But the really good news for Home Depot stock came from the company’s raised full-year forecast.
Anyone holding Home Depot stock has to be at least a little disappointed with this year’s performance give all that the company has going for it. Cheap gas. Low interest rates. Higher wages. Steady job growth. Every one of these factors is prompting an increase in new housing formation and home renovation projects.
Yet despite these drivers, HD shares are trailing the broader market. Heading into Tuesday earnings, Home Depot stock was up less than 4% for the year-to-date vs. a 7% gain in the S&P 500.
Maybe the Street can gain some sanity and use HD’s strong second-quarter earnings and outlook as a catalyst for outperformance over the remainder of the year.
What Should Drive Home Depot Stock
For the most recent three-month period, Home Depot earnings came to $2.44 billion, or $1.97 a share, up from $2.23 billion, or $1.73, a year prior. That matched analysts’ average estimate, according to a survey by Thomson Reuters.
Revenue increased 6.6% to $26.47 billion, which also was in line with estimates. Same-store sales — an important retail metric — gained 4.7%.
CEO Craig Menear said in a statement:
“We had a solid quarter, achieving the highest quarterly sales and net earnings results in company history as housing continues to be a tailwind for our business.”
Improved conditions heading into the second half of the fiscal year allowed HD to lift internal estimates. The retailer now expects earnings per share to grow approximately 15.6% from fiscal 2015 to $6.31. That matched the Street’s current forecast.
No, this wasn’t the type of blowout beat-and-raise earnings report that blasts a stock out of a cannon, but that doesn’t mean HD stock won’t be a sneaky good bet from here. Economic trends continue to build in Home Depot’s favor, and the company is taking advantage of the fact.
In addition to strengthening fundamentals, sentiment remains strong on Home Depot stock. The forward price-to-earnings multiple remains in line with its own five-year average despite better growth prospects. It also helps that Wall Street has a generally positive view. Of the 31 analysts covering the stock, 23 call it a “buy” and eight have it at “hold.”
HD shares have shown signs of outperformance recently. Since the market’s late-June stumble, shares are up almost 10%.
Between its earnings and outlook, Home Depot stock should be winner through to year-end and beyond.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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