It would be a major understatement to say Home Depot (HD) has benefited immensely from the massive surge in home prices over the past two years, during which home prices have skyrocketed.
Home Depot management noted in their recent earnings call that home equity values over the last two years had increased by 40% or over $7 billion. Because of home price appreciation, the homeowner had more money to spend on home improvement projects, which is the main driver of Home Depot’s revenue. Heading into the company’s second quarter fiscal 2022 earnings results, which are due before Tuesday’s opening bell, investors want to know the level of confidence Home Depot has that its main revenue pipeline can continue.
Thanks to the aforementioned trend in home price appreciation, Home Depot has been a strong Dow performer over the past two years. But so far in 2022 the company has been adversely impacted by soaring interest rates which have helped to slow the housing market. If that weren’t bad enough, the company’s gross margins have been shrinking because of higher inflation rates. Higher input costs and weakening consumer demand has caused margin erosion within this business.
These trends have had a negative impact on Home Depot stock, which has fallen 26% year to date, trailing the 13% decline in the S&P 500 index. Interest rate hiking cycles have historically hampered home improvement stocks. While there is still confidence in the housing market which has held up relatively well, the company’s guidance on Tuesday will be a key indicator of where the management believes the housing market and consumer spending will be in the next several quarters.
In the three months that ended July, the Atlanta, GA.-based company is expected to earn $4.95 per share on revenue of $43.37 billion. This compares to the year-ago quarter when earnings were $4.53 per share on revenue of $41.12 billion. For the full year, ending in December, earnings of $16.46 per share would rise 6% year over year from $15.53 per share, while full-year revenue of the $156.23 billion would rise 3.4% year over year.
Analysts at Citigroup recently listed Home Depot among its Thematic Thirty stock screen, a list it calls “most attractive on fundamentals, sentiment and valuation” into the second half of the year. “From here, we look under the hood of these baskets and provide a list of Citi Buy rated stocks that have high/medium exposure to what we believe are the most attractive themes within the S&P 500,” wrote Citigroup strategist Scott Chronert.
From an execution perspective, the home improvement giant has established a strong track record for beating consensus estimates, surpassing both revenue and profit estimates in the last ten quarters. The market seems to be warming up to the fact that another beat is in store. Ahead of Tuesday’s results, Home Depot stock has rebounded sharply from their 52-week low in mid-June, gaining more than 15% over the past two months.
In the first quarter the company beat on both the top and bottom lines, posting EPS of $4.09, beating estimates by 39 cents, while Q1 revenue of $38.91 billion reached the company record and topped estimates by more than $2 billion. Just as impressive, Home Depot rose same-store-sales by 2.2%, which was a surprise given that analysts had expected a decline. The company noted that despite persistent supply chain and inflation issues, it was maintaining strong margins, and raised full fiscal year guidance.
On Tuesday investors will want to see whether Home Depot can continue to navigate through inflationary headwinds as well has it has in the past two quarters.
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