The last time I wrote about Home Depot (NYSE:HD) and HD stock was in mid-August, just before the home-improvement retailer released its second-quarter earnings.
Here’s what I said on August 13:
“The home-improvement retailer reports its Q2 2018 earnings Tuesday before the market opens. Given the hot economy, anything less than a home run will result in HD stock revisiting the $170s.”
At the time, HD stock was trading around $195.
Fortunately for owners of HD stock, the company crushed earnings, launching it on its next leg up. HD stock hit a 52-week high of $215.43, precisely one month later.
HD Stock’s Q2 Victory
HD’s Q2 revenues and earnings were 1.4% and 7.4%, respectively, higher than analysts’ consensus outlooks.
But it was the company’s raised guidance that likely spurred investors’ interest.
HD increased its full-year revenue guidance from 6.5% growth to a 7.0% increase. Same-store sales, a key metric for retailers, was bumped from 5% for the year to 5.3%.
Lastly, and probably most enticing for investors, HD provided earnings per share guidance of $9.42 for fiscal 2018. That’s 29% above the company’s FY17 EPS.
And Then Came Fall
Like an Arctic air mass bringing in colder weather, HD stock has been pummeled mercilessly in the three months since hitting its 52-week high, falling to as low as $167 in late November before recovering slightly.
Was it the market’s October meltdown that caused Home Depot stock to retreat or something more company- specific?
Well, it did lose 15% in October, so the meltdown of the markets was a factor.
On the earnings front, HD announced good third-quarter results that included beating analysts’ consensus revenue estimates by $40 million and their consensus EPS estimate by 25 cents,
Furthermore, it provided same-store sales growth guidance of 5.5%, a slight increase from its second-quarter guidance.
The Outlook for 2019
Home Depot’s management seems very confident in its business and the strength of the home improvement market.
“There’s been a lot of concern out there in the marketplace about a slowdown in housing,” Brian Nagel, Oppenheimer senior equity research analyst, told CNBC in November. “As I look through [Home Depot’s] results, I’m not seeing it. … The underlying demand for housing seems to be quite good. That typically goes back to jobs growth.”
Home Depot doesn’t see it either.
On HD’s Q3 2018 conference call, CFO Carol Tomé explained how the company estimates future sales growth.
It starts with GDP growth and then looks at consumer sentiment. Consumer sentiment is near all-time highs, and unemployment is lower than it’s been in 50 years.
Furthermore, the CFO said that although the housing market isn’t nearly as hot as it was, other factors that affect how much consumers spend on home improvement are still positive. Among these factors are still-rising house prices, aging homes, household formation, and housing turnover.
HD stock doesn’t need perfect economic conditions to do well; it just needs healthy employment and confident consumers, both of which it has heading into 2019.
The Bottom Line on HD Stock
Significant drops in the market like the 800-point decline on Dec. 4 scare the heck out of average investors. But the market’s tumble is normal; it’s a sign that investors are uncertain about the future.
If you own HD stock, I wouldn’t sell it because HD’s business is operating at a very efficient level. If you don’t own HD stock, I’d consider taking a position at these prices with cash in reserve if prices drop into the $160s.
Barring obvious signs of a recession, I expect HD to bounce back in 2019.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
