The world’s largest home improvement retailer Home Depot (NYSE:HD) will release Q1 earnings on May 19. Year-to-date, HD stock is up about 6%.
However that number tells only half the story. On March 18, the shares hit a 52-week low of 140.63. Now, they are hovering at around $232. Home Depot stock has increased by 65% in less than two months.
The group operates 2,292 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.
It is also a member of the Dow Jones Industrial Average. Therefore when Home Depot reports earnings, the market pays close attention. I’d like to take a closer look at the prospects for the company’s shares in the coming days.
Earnings and HD Stock
When the Atlanta-based group announced fourth quarter and fiscal 2019 in late February, quarterly earnings topped analysts’ expectations. However, Q4 revenue of $25.8 billion was less than a year ago when it had hit $26.5 billion in the fourth quarter of fiscal 2018. Same-store sales were also up 5.2%.
The group has been spending heavily to integrate its stores and online business. It is in the middle of a three-year, $11 billion investment program. And as a result, margins have come under pressure in the past quarters. Management expects 2020 to be the peak year of investments.
In fiscal 2019, it had sales of $110.2 billion and earnings of $11.2 billion. Following the strong year, the board increased the quarterly dividend by 10%. At the time management also reiterated its fiscal 2020 business outlook when it said it expected sales growth of approximately 3.5% – 4.0%.
However, since then, personal and professional lives, as well as corporate operations for most businesses, have changed drastically. Unlike many other retailers, Home Depot is an essential retailer. Thus amid the lockdown, its stores have remained open, albeit with decreased business hours.
It is not easy to judge the full impact of the pandemic on Home Depot’s earnings. As many people are spending more time at home, there may be increased demand for home improvement DIY products and tools.
In a press release of March 18, management highlighted that “Homeowners and businesses depend on The Home Depot for urgent needs such as hot water heaters, refrigerators, cleaning supplies, electrical and plumbing repairs, and harsh weather items like tarps, propane and batteries.”
However, the increased sales may already be reflected in the recent impressive run-up in the HD stock price. Thus, you may want to study the Q1 metrics before committing new capital into the business.
Home Depot Is Ripe for Profit-Taking
On February 21, HD stock hit an all-time high of $247.36. As I write it is hovering around $232.
Long-term shareholders may remember that in October 2008, it was around $14. And that eye-popping return over the past 11 plus years does not include the dividend payouts or the reinvestment of those dividends.
So Home Depot has been a great long-term investment for many investors. However, in the short run, the share price tends to be volatile, especially around earnings dates.
Are you currently an investor in HD stock who has also participated in the recent increase in price? Then, you may want to ring the cash register and realize some of the gains. While long-term investors would like to see the price go and stay over $240 and even $250, short-term traders will likely keep it between $200 and $225.
I would consider investing in HD stock if the price goes toward $200 or even below. Meanwhile, long-term shareholders would enjoy a current dividend yield of 2.6%.
Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a one- or two-month time horizon. An ATM covered call position with June 19 or July 17 expiry would offer you some downside protection. It would also enable you to participate in a potential up move.
The Bottom Line on Home Depot
Many analysts agree that in general, the retailer’s sales are a good reflection of the strength of the housing market and the overall economy. Therefore the longer the various degrees of lockdown continues, the more uncertainty we are likely to have regarding the economy, not only in the U.S. but also globally, including Canada and Mexico where Home Depot has stores.
As long as the pandemic continues, consumers, who may also be deeply concerned about their own jobs, will possibly spend less on non-emergency DIY jobs and tools. Over 30 U.S. million workers have filed for unemployment in the past two months.
Thus Home Depot cannot potentially be immune from the economic shutdown. And in the rest of 2020, there may simply not be the same tailwinds, i.e. the strength of the U.S. economy and consumer witnessed in prior years.
Nonetheless, if you are a long-term investor with a 2-3 year time horizon, then you may consider buying the dips.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.
