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The Home Depot, Inc.: Where Will the Stock Move after 1QFY14 Results?

The Home Depot, Inc.: Where Will the Stock Move after 1QFY14 Results
By: Bob Cramer
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The stock price of The Home Depot, Inc. (HD) has remained almost flat over the last three months, ever since the announcement of its results for the fourth quarter (4Q) of its fiscal year 2014 (FY14). However, it has seen a lot of volatility during this period with 1.1% standard deviation in its returns compared to 0.7% standard deviation in the returns from the S&P 500 Index over the same period. This is due to the increasing confusion about the industry’s growth prospects and mixed sentiments about recovery in housing.

While homebuilding companies beat estimates and contractors are mostly optimistic about the demand for homes, housing data continues to show weakness, thus leading to confusion about the growth in demand for home improvement retail. Home Depot is expected to announce its results for 1QFY14 at 9 am EDT on Tuesday. Bidness Etc provides an overview of the company’s historical performance and expectations about the forthcoming results.

Home Depot: Historical Performance

Home Depot has beaten analysts’ estimates for adjusted earnings every quarter since 1QFY08, despite missing sales expectations in six of these quarters. Active share repurchases and improvements in efficiency are the two primary reasons why the company has been able to outperform earnings expectations even with slow sales. The company beat earnings estimates by an average of 10.5% over this period and its stock price increased roughly 1% on average during the week after the announcement of results. There is no significant correlation between Home Depot’s earnings surprise and stock price change, and the company’s stock performance depends more on its ability to outperform its competitor Lowe’s Companies, Inc. (LOW) in both sales growth and share repurchases. The stock price of Lowe’s has outperformed Home Depot’s by six percentage points (ppts) over the last one year by reducing the gap with Home Depot’s same store sales (SSS) and creating value for shareholders through more active share repurchases.

same-store-sales

Home Depot: Housing Trends during 1QFY14

The new and existing home sales, pending home sales, housing turnover, mortgage applications, and the Remodeling Market Index are important indicators of the demand for home improvement products and all these have shown weakness during the last three months. The decline reflects that home improvement retailers would have continued to face pressure on their top line with poor weather being a key reason for the decline.

The NAHB Remodeling Market Index (RMI), which provides information for everything from additions to repairs required to gauge the maintenance levels of existing homes, declined 4.6% for current market conditions in the first quarter of 2014 and by an even larger 9.8% for future market conditions. This reflects a possible slowdown in the demand for products related to maintenance of homes during this period.

nahb-remodeling-market-index

US existing home sales are one of the most significant drivers of the demand for home improvement products. These decreased 7.2% and 8.5% YoY in the months of February and March with bad weather quoted as one of the primary reasons. The decline in existing home sales would have largely impacted Home Depot’s top line growth.
year-over-year-change-in-us-existing-home-sales

Home Depot: Earnings Estimates

Analysts expect Home Depot to announce 19% YoY growth in its adjusted earnings to $0.99 per share for 1QFY14 despite a 91 basis points (bps) contraction in gross margins to 35%. Furthermore, they estimate that revenues will grow by 4% to $19.95 billion for 1QFY14. We believe that the continuous pressure on the demand for home improvement retail products due to bad weather and weakness in home sales could lead to the company missing estimates. However, Home Depot might beat the earnings estimates through active share repurchases and improvement in productivity.

 

Also read our analysis of the differences between Home Depot and Lowe’s as an investment.

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