Home Depot (NYSE:HD) is set to report third quarter results on November 19 and the current expectations call for significant earnings growth. The company's stock has risen over 20% year-to-date, making it one of the top performers in the Dow Jones Industrial Average. Let's take a look and see if we should be buying before the report or if we should wait to see what the company has to say before initiating a position.
The home improvement king
Home Depot is the largest home improvement specialty retailer in the world. It currently operates 2,258 locations in the United States, Puerto Rico, U.S. Virgin Islands, Canada, Mexico, and Guam. The company was founded in 1978, went public in 1984, and has been a part of the Dow Jones Industrial Average since 1999.
(Image Source: Home Depot)
On August 20, Home Depot reported second quarter earnings that left analyst expectations in the saw-dust:
|Earnings Per Share||$1.24||$1.20|
Third quarter results are due out before the market opens on Tuesday, November 19. Here are the current consensus analyst estimates:
|Earnings Per Share||$0.89||$0.74|
|Revenue||$19.1 billion||$18.1 billion|
Earnings are expected to grow 20.3% and revenue is expected to rise 5.5% compared to the same period in 2012. Other than the key metrics, I would like to see Home Depot's margin expand and an update on the $17 billion share repurchase program currently in place. Also, it will be important to look at fourth quarter guidance and see management's views on home building, improvement, and remodeling activity. Overall, I am bullish on Home Depot going into the third quarter report.
Bullish indicator: Supplier strength
Masco Corporation (NYSE:MAS), one of Home Depot's largest suppliers, reported third quarter results on October 28. The results exceeded analyst expectations and showed strong growth on both the top and bottom lines; earnings grew 92.9% and revenue rose 12.4% year-over-year. Management stated that strength in home improvement and remodeling projects were primary drivers for the great performance, which is basically saying that sales to Home Depot and Lowe's were the reason for increased sales. I believe that Masco's report along with its comments are some of the strongest indicators pointing toward an explosive quarter for Home Depot.
Lowe's (NYSE:LOW) is the second largest home improvement retailer in the world, with 1,758 home improvement stores in the United States, Canada, and Mexico. The competition between this company and Home Depot used to be heated, but Home Depot has outpaced Lowe's same-store sales growth for 16 consecutive quarters, widening the gap by a very large margin.
On Aug. 21, Lowe's had a very impressive quarter in which earnings rose 37.5%, net sales rose 10.3%, and margins expanded. It is set to report third quarter results on November 20, so keep a close eye on Home Depot's report the day before as it may be a direct indicator of how Lowe's will report. With that said, I still prefer Home Depot over Lowe's as a long-term investment.
The Foolish bottom line
Home Depot is a great American company that has been building wealth for decades. It is undervalued based on forward estimates and could become even more undervalued after the quarterly report on November 19. The company also pays out a healthy 2% dividend which will provide additional returns to long-term investors. I believe Home Depot should be bought going into the report and on any weakness following this report or in the future. As always Foolish investors should do their own research before making any investment decisions.
Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.