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Will Home Depot Earnings Turn the Stock Around?

By Dan Caplinger – Feb 15, 2016 at 12:34PM

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An uncharacteristic drop in the stock has some investors worried, but the home-improvement retailer's fundamentals are strong.


Image source: Home Depot.

Home-improvement giant Home Depot (HD 0.79%) performed extremely well in 2015, giving investors much better returns than they would have gotten from investing in rival Lowe's (LOW 0.89%). Fortunes change, however, and Home Depot has opened 2016 with a sizable pullback due to overall fears about the economy generally and the housing market in particular. Coming into its fourth-quarter financial report on Feb. 23, Home Depot investors expect the retailer to keep producing solid growth, and their hope is that solid results will restore confidence and help the share price rebound. Let's look more closely at what's been happening with Home Depot lately and what investors can expect in its quarterly report.

Stats on Home Depot

Analyst EPS Estimate

$1.10

Change From Year-Ago EPS

10%

Revenue Estimate

$20.37 billion

Change From Year-Ago Revenue

6.3%

Earnings Beats in Past 4 Quarters

3

Data source: Yahoo! Finance.

Can Home Depot earnings keep climbing?
In recent months, investors have had mixed views about Home Depot earnings, cutting their fourth-quarter estimates by a penny per share but boosting their projections for the current fiscal year by $0.04 per share. The share price hasn't behaved nearly as well, falling 6% since early November.

Home Depot's third-quarter results sent the stock soaring in the early part of the quarter. The retailer said that comparable-store sales climbed 7.3%, accelerating from previous quarters and helping to boost earnings per share by 17%. Home Depot brought in more than 370 million customer transactions for the quarter and boosted its margins even further. The company's expectations going into the holiday quarter were extremely strong, featuring yet another increase in guidance for the full year, and further increases to stock repurchase activity boded well for Home Depot's stock price.

Yet the beginning of 2016 brought a stock market correction, and Home Depot wasn't able to avoid a double-digit percentage drop in its shares. Housing analysts have had mixed views recently, and some have pointed to recent actions from the Federal Reserve to raise interest rates as a sign that mortgages will get more expensive and make it less affordable for would-be homebuyers to keep pushing purchase prices higher. So far, the anticipated rise in mortgage rates hasn't happened, and economic fears have actually held rates down. Still, after such a long bull-market move, Home Depot's bearish investors seem justified in expecting some share-price volatility.

One reason for optimism is that Home Depot is starting to gear up for its even more important spring growing season. The company said it would hire more than 80,000 workers for its 2,000 stores and 75 distribution facilities. Home Depot sees the period as its busiest, and last year, more than half of the associates that the home-improvement retailer brought on during the spring stayed on to fill permanent positions. Given the pace of Home Depot's growth, having that advantage in labor-force engagement is important to fend off competitors like Lowe's.

That's important, because Home Depot can't afford to stand still. Lowe's recently announced that it would acquire Canadian hardware and home-improvement store chain Rona, forming the largest player in the industry in Canada. Lowe's attempted to buy Rona back in 2012, but the sweetened offer worth a total of $2.3 billion was enough to do the trick the second time around and should close in the second half of 2016. Home Depot's domestic business has done enough to sustain its leadership role, but international expansion could be important to future growth down the road.

In Home Depot's quarterly report, investors need to watch for any signs that could shed light on the future of the U.S. housing market. Home Depot hasn't been entirely captive to the ups and downs of the economy, proving its ability to make the most of tough conditions during the housing crunch. Yet Home Depot clearly does better when growth fires on all cylinders, both from professional contractors and from do-it-yourself homeowners. If things still look clear, then Home Depot could post a nice rebound from its early 2016 share-price losses.

Dan Caplinger 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.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$268.69 (0.79%) $2.11
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$187.67 (0.89%) $1.65

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