Does Home Depot Still Have Tailwinds?

The Home Depot, Inc. (NYSE: HD) is scheduled to report its fiscal third-quarter results Tuesday before the markets open. This will be the first quarterly report since the home improvement retailer announced a data breach that affected many customer accounts. This will also be the first report with Craig Menear as chief executive officer.

Note that smaller rival Lowe's Companies, Inc. (NYSE: LOW) is also scheduled to share its latest results this week. Analysts are looking for solid growth on both the top and bottom lines.

Expectations

Analysts on average predict Home Depot will report that revenue for the quarter was around 5 percent higher year over year to $20.47 billion. Earnings of $1.13 per share are also in the consensus forecast. That would be up from the reported profit of $0.95 per share in the comparable period of last year, as well as down from $1.52 in the previous quarter.

The consensus EPS estimate has ticked up a penny in the past 60 days, and the individual estimates range from $1.11 to $1.17 per share. Home Depot beat EPS expectations by almost 5 percent in the second quarter, though it fell short in the period before that.

Looking ahead, analysts so far expect year-over-year earnings growth of more than 15 percent for the current quarter (which includes the holiday shopping period) and for the full year.

Analyst Color

Deutsche Bank had this to say in a note to clients: "We believe the biggest company-specific risks for HD to the downside is any reversal in favorable housing trends that are creating a significant tailwind for the industry. To the upside, HD has invested heavily in its distribution facilities and store labor, which may bear returns faster than we anticipate."

JPMorgan also commented to clients: "We believe HD remains one of the best long-term stories in retail given company-specific sales and margin initiatives, the duopoly/AMZN-resistant nature of the industry, and significant financial and operating leverage that amplifies EPS growth in better sales environments. With internal momentum building, we expect Home Depot to benefit from its refocused branding and value proposition, which have driven favorable traffic and ticket trends at the retailer."

Bank of America said of its $100 price target on Home Depot: "Downside risks to our price objective are further weakening in the housing market, deterioration in the competitive landscape, unseasonable weather and poor execution in supply chain upgrades. Upside risks are a noticeable acceleration in the housing market or further acceleration in same-store sales trends."

Performance

Home Depot has a long-term EPS growth forecast of more than 16 percent and its price-to-earnings (P/E) ratio is a little less than the industry average. The operating margin is greater than the industry average, while the return on equity is a healthy 46 percent. The number of shares sold short, as of the most recent settlement date, represents about 1 percent of the total float.

The consensus recommendation of the 30 analysts surveyed by Thomson/First Call who follow the stock is to buy shares of Home Depot. Nine of them rate the stock at Strong Buy. However, the analysts' mean price target, or where they expect the stock to go, is only marginally higher than last Friday's close of $98.24.

The share price hit a multi-year high last week of $99.36, which was above that consensus price target. Shares have seen a more than 17 percent gain in the past three months and are trading more than 19 percent higher year-to-date. Shares are also well above the rising 50-day and 200-day moving averages.

Over the past six months, Home Depot stock has handily outperformed the broader markets, but it has narrowly underperformed competitor Lowe's.

At the time of this writing, the author had no position in the mentioned equities.

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