A Great Year For Home Depot Is Priced In
Shares of Home Depot (NYSE: HD) are up nearly 3.0% in premarket trading because of a strong Q1 earnings report. The report beat the consensus in all metrics and reveals an acceleration of business if nothing else. This news may propel shares even higher, possibly to a new all-time high, but we are starting to get a little worried this market is overextending. Not only is there a very real possibility a lot of the expected Q2 growth occurred in Q1, but there are also signs of slowing activity at Home Depot stores.
Over the past few weeks, economic stimulus checks began running out, inflation surged (specifically for lumber), gas shortages damped a lot of activity in the southeast and our local Home Depot turned into a ghost town. One of our team built a simple 4X4 sandbox and it cost $112 just for the wood versus $60 for the same board last year.
The takeaway, Q1 results are fantastic but Q2 may not be as good as the market is hoping for. Simply looking at this from the comp perspective, last year’s Q2 was robust, the highest in the company’s history at $38.05 billion, so the bar to beat is very high. The Q1 results are good but not quite that good, at best we think we’re looking at flat YOY revenue growth in Q2 with the possibility of contraction and maybe a deep contraction at that.
Home Depot Builds On 2020 Momentum
Home Depot had a fantastic Q1 and perhaps too fantastic from our point of view, the how-it-affects-share-price point of view. The company’s $37.5 billion in net revenue is up 32.7% from last year and topped the consensus by 870 basis points. The beat was driven by a 31% increase in comp-store sales that was in turn driven by a 19% increase in transactions and a 10.3% increase in ticket average. In the U.S., comps rose 29.9% while the total revenue per square foot increased by 29.8% to $605.60.
Moving down the report we find some more good news. The company’s gross and operating margins both narrowed over the past year but less than expected to drive a solid beat on the bottom line as well. The company’s GAAP earnings came in at $3.86 and beat the consensus by $0.84. The company did not offer any guidance which is not really a surprise. Home Depot has not resumed guidance since the pandemic began and conditions are still volatile enough to shy away from it now. However, with the Q1 results in the bag, the comparison with the full-year consensus is strong; Q1 results are 30% of the FY total with arguably strong quarters ahead of them.
The Analysts Are Bullish On Home Depot
The analysts are bullish on Home Depot and pushing the consensus price target higher. The consensus assumes the stock is fairly valued near $320 or about 00% upside but the most recent activity is more bullish. The first response post-release is from Bank America which shares the Wall Street high price target of $375. In their view, the Q1 results are good but not good enough to warrant a rating or target change.
"We remain encouraged on the medium-term outlook for HD as the dominant retailer in a strong category of retail. We reiterate our Buy rating on HD and price objective of $375 ... “ Analyst Elizabeth Suzuki.
The Technical Outlook: Home Depot Moves Up After Earnings
Shares of Home Depot advanced more than 2.25% in early trading and look like they may move higher. The caveat is that this uptrend may be over as there is risk present in the charts. To start, the most recent low is a lower low than the previous which reveals a little underlying weakness in the market. Beyond that, until the stock makes a new high there is a risk of sideways range-bound trading and reversal. Assuming the $320 level is a firm support level the stage is set for price action to form a Head & Shoulder’s Reversal with the April peak as a shoulder. There is also the possibility for price action to form a Double-Top Reversal with the May peak as the first top.
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