
Home Depot's Foundation Still Solid Ahead of Third-Quarter Earnings
Home Depot (HD) - Get Report , the world's largest retailer of home-improvement products, will report third-quarter earnings results before the opening bell Tuesday. Owing to its consistent improvements in comparable-store sales (up 4.2% in the second quarter) and higher gross margins, HD stock -- up 16% on the year -- has been a standout performer, crushing the not only the S&P 500 (SPX) , but also the SPDR S&P Retail ETF (XRT) - Get Report (down 11% in 2015).
If you're thinking about taking profits ahead of Tuesday's results, think again. Even as its shares trade near all-time highs of $125, Home Depot's earnings-per-share (EPS) estimates for the just ended quarter continue to climb. Since the start of the quarter, the EPS has risen 2 cents, from $1.30 a share to $1.32. During that span, estimate for the fiscal year, ending in January, have climbed 4 cents, from $5.27 a share to $5.31, implying 16% year-over-year EPS growth above 2014.
If that's not impressive enough, consider 2016 is setting up to be even better. Not only is Home Depot, which has beaten Wall Street's earnings estimates in five straight quarters, riding a hot hand, there are now clearer signs that residential home construction has begun to improve, according to the U.S. Census Bureau.
That both building permits and housing starts have ticked up bodes well for Home Depot's sales and profits in the quarters and years ahead. More homes would translate to more demand for things like lumber, flooring and appliances.
The anticipated growth in Home Depot's revenue would explain why HD stock -- despite its already strong 2015 gains -- still has a consensus buy rating and an average analyst 12-month price target of $133, suggesting better than 9% additional gains from current levels of around $121. Granted, 9% premium in 12 months is nothing to write home about. Its high target of $142, however, would yield more than 17% gains.
Plus, combined with its solid 59-cent quarterly dividend that yields about 2.00% annually, there's tons of implied value in HD shares. And to say nothing about the company's plans to cut costs and centralize its distribution centers. These maneuvers, which should fuel higher gross margins, can result in higher profits, too.
HD stock -- at around $121 -- is still a bargain. In short, here's a market leader that is growing annual earnings at mid double-digit rates and pays a solid yield. So until its growth momentum slows, it would be a mistake to part with this winner.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








