Home Depot Inc (NYSE:HD) stock tried to rally Tuesday, but couldn’t muster much upside. The retailer beat on earnings per share and revenue expectations, giving bulls a reason to initially bid up Home Depot stock. But despite such good results, HD is flat on Tuesday. Shouldn’t it be doing better?
Earnings of $1.69 per share came in 8 cents per share ahead of expectations, while revenue of $23.9 billion grew 7.6% year-over-year and came in $240 million ahead of forecasts.
Those results were good, but what was great?
The company’s comparable-store sales, which grew a whopping 7.5%. Analysts were “only” expecting 6.5% comp-store sales growth, which would still be a great result.
Valuing Home Depot Stock
As good as Home Depot’s earnings were, its conference call and guidance were even more reassuring.
The company’s guiding for sales growth of 6.5% and comp-store sales of 5% in 2018. Its outlook calling for earnings of $9.31 per share represents almost 30% year-over-year growth. This growth is not coming via expansion either, with HD opening just 3 stores in 2018. The company also expects to buy back $4 billion worth of Home Depot stock this year and just raised its dividend by almost 16%, giving it a yield near 2.2%.
But Home Depot took it a step further and updated its 2020 outlook. Management expects sales between $115 billion to $120 billion, easily ahead of the $112 billion analysts are modeling for. Management’s outlook for 2018 also came in ahead of forecasts, for what’s it worth.
Honestly, how can you not like Home Depot stock at this point? HD stock trades at a reasonable 20 times this year’s earnings. It grew sales 6.7% last year and earnings by 13%. It expects similar sales growth for the next few years and even larger earnings growth. Management has shown it’s willing to return capital to shareholders via dividends and buybacks. Finally, this growth is coming without HD ploughing resources into store expansion.
It’s effectively fighting back against Amazon.com, Inc. (NASDAQ:AMZN), showing that it has a moat wide and deep enough to fend off the e-commerce stalwart. Further, during its conference call management stifled any worries about rising interest rates crushing the housing market. Management says mortgages rates would need to hit 7% before it becomes a concern.
In other words, 20 times earnings for a high quality, double-digit earnings growth stock is pretty reasonable.
Trading HD Stock Price
What else makes HD stock price attractive? Approaching the spring selling season certainly helps.
There are many catalysts for this company when it comes to a seasonality standpoint.
Holidays aside, there are plenty of tools, gadgets and equipment homeowners need for the winter. In the spring, we get spring clean-up supplies, gardening sales and projects started. In the summer we get patio and deck projects, along with lawn care, barbecue and other outdoor product sales. Finally, in the fall, it’s back to clean-up mode and last-minute projects before the winter comes.
Wash, rinse, repeat. That’s why Home Depot stock remains such a great hold. The average price target on HD stock is roughly $205. That implies almost 10% upside from current levels. Ironically enough, should HD stock price get to that $205 target, it will be knocking on the doorstep of new all-time highs.
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On the charts, we can see there is strong support in the low-$180s. Will it get there?
To be honest, I’m surprised Home Depot stock isn’t reacting more bullishly on these numbers.
A top and bottom-line beat, big bump in the dividend and strong guidance for a stock at a reasonable valuation? Color me shocked.
Long-term investors can justify holding a long position in HD stock. New long-term buyers can consider buying right now.
Both of these buyers, as well as short-term traders, may want to consider buying near $180 if HD gets there. Not only should support come into play based on historical prices, but the 100-day moving average should act as support as well.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
