Home Depot Earnings Preview: Second Quarter

Home Depot [[HD]] is scheduled to report their second quarter results before the market opens on Tuesday, August 18. Based on our analysis, we at EarningsPreviews.com are expecting HD to report better than expected results that exceed Wall Street’s consensus expectations.

 

Analyst Expectations

We are forecasting revenues of $19.27 billion and EPS of $.60. This would represent an 8% decline in revenues from last year’s $20.99 billion in the same period. The current analyst consensus estimates calls for revenues of $19.15 billion and EPS of $.58. On May 19, the company reaffirmed its full year guidance of a 9% decline in sales.

 

Despite the increasing optimism over improving economic conditions, the market continues to send out mixed signals. While the June unemployment numbers were surprisingly strong, few expect that the unemployment rate has truly peaked yet. However, the improving employment situation appears to be making consumers more comfortable with investing in home improvement projects once again, particularly for do-it-yourself (DIY) projects. This bullish sentiment along with the increasingly positive signs that the housing markets may have bottomed are all incremental positives for Home Depot.

 

Last quarter’s sales decline of only 10% was a significant improvement over the 17% decline Home Depot saw in the fourth quarter. We expect further improvement this quarter as the home improvement retailer benefits from an improving economy and more favorable comps.

 

Stock Performance

Since the beginning of 2009, Home Depot’s shares have gained 17% and has outperformed the nearly 7% gain in the Dow Jones industrial average. Last year, HD’s stock fell less than 15% and easily outperformed the 34% drop in the Dow Jones industrial average.

 

Valuation

Shares are now trading at 16x consensus 2010 EPS estimates. This is a slight premium to the relative valuations of their peer group. Home Depot’s stock is likely to continue trending higher as more signs of economic recovery and improvements in the housing markets begin to come in.

 

Recommendation: Buy with a $28 price target.

 

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