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Is Home Depot Stock a Buy After Crushing Earnings Estimates?

By Parkev Tatevosian - May 28, 2021 at 7:16AM

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Consumers with stimulus checks fueled a spending spree, but does that make the home improvement retailer a longer-term buy?

Home Depot (HD 0.57%) reported first-quarter earnings that crushed estimates on Wall Street. The home improvement retailer reported robust revenue growth despite going up against tough comparisons from last year. 

Given that more people are vaccinated and the spread of COVID-19 is trending downward, the outperformance by Home Depot caught many by surprise. The thought was that as people have more options for where they can spend money, they would reduce the amount they spend on home improvement. But that has not yet materialized as folks continue to prioritize spending on their homes. 

Home Depot's first-quarter outperformance 

Revenue increased by 32.7% year over year in the first quarter compared to the same quarter last year. That was much better than the 24.1% that analysts expected. Stimulus checks that hit bank accounts in March certainly played a large role as over $300 billion was distributed to qualifying U.S. residents.

Person holding a sign that reads stimulus checks.

Revenue increased by 32.7% at Home Depot in the first quarter. Image source: Getty Images.

Moreover, Home Depot reported better-than-expected earnings per share (EPS). While analysts were expecting EPS of $2.98, Home Depot reported $3.86. Higher profits are a result of the surge in revenue and the reduction of COVID-related expenses.

Tailwinds for Home Depot

One tailwind that continues to play out is folks feeling comfortable inviting professional contractors into their homes again. This segment of the market saw a major drop-off during the pandemic. Understandably, people were not comfortable allowing workers inside their homes at the height of the pandemic when the risk of infection was elevated. 

Now, as more people are vaccinated, and the spread of COVID-19 is declining, people are increasing projects requiring professionals. Indeed, here's what Home Depot COO Ted Decker had to say on the matter in the company's first-quarter conference call

"Sales to our Pro customers continued to strengthen, posting the fourth consecutive quarter of accelerating growth and the best quarterly growth rate on record. Pros continue to tell us that project demand is strong, and their backlogs are growing."

The lumber aisle at Home Depot.

Lumber prices have been surging as increasing demand meets supply constraints. Image source: Home Depot.

Bigger projects that require professional help could sustain elevated revenue levels a while longer, even if consumers spend less on do-it-yourself projects in the rest of 2021. 

What this could mean for Home Depot investors 

For one, the excellent quarter should alleviate some fears of a snapback of revenue sharply below the higher levels since the start of the pandemic. If anything, it looks like it will be a slower adjustment of the growth rate back toward long-run levels of mid-single digits. That's just fine for Home Depot. It's been able to steadily increase its profit margin over the last decade, to 10.45% from just under 6% in 2012.

Home Depot is a superior performer that is likely to increase the wealth of long-term shareholders over the next 10 or 20 years. Moreover, the stock is trading at a reasonable price close to its historical averages. As a result, investors with a buy-and-hold strategy can add Home Depot shares at current prices. Be aware, however, that there may still be volatility around the corner as consumers adjust to life after getting vaccinated and the risk of COVID diminishes.

Those who wish to take the more cautious approach can wait to see how consumer behavior evolves over the next few quarters to start a position in Home Depot. 

 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool has a disclosure policy.

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