Home Depot earnings preview

Home Depot reports its second-quarter results before US trading begins on Tuesday.

When the Dow dropped more than 200 points, or 1.4%, on Thursday, Home Depot, one of its component stocks, fell far more sharply, tumbling close to 3%. This was an interesting price move, just a few days ahead of Home Depot’s quarterly results and on a day when the National Association of Home Builders reported the highest level in its housing market index since 2005.

Home Depot is a retailer, of course, and it’s likely that Wal-Mart slashing its forecasts for the year helped dragged down any shares related to retail, but crucially Home Depot is a specialist home retailer, selling home-improvement goods, and so it should thrive when the housing market advances.

Further evidence of the improving state of the housing sector came today in the form of a 5.9% bounce in housing starts in July. Construction on housing started in July will not feed into sales for Home Depot for a good while yet, but the upward trend in housing does point to futures sales for Home Depot, as home owners spend to do up their new homes.

There is a concern though that although the economy has been improving, with more jobs and strength in the housing market, consumers are still not spending as much as might be expected. The latest survey on consumer sentiment from the University of Michigan showed a sharp drop in how consumers are feeling about the economy and that may translate into a tightening of the purse strings.

Wall Street analysts expect Home Depot to report quarterly earnings of $1.19 per share on sales of $21.7 billion.

The company has done a good job of increasing store productivity over the last few quarters, and investors will be expecting to hear more of the same for Q2. Reportedly, the company has been focusing a large portion of its capital expenditure on IT and e-commerce, and I will be curious to see how this translates into revenue.

Home Depot’s P/E ratio, trailing twelve months, stands at a little over 23, which is actually lower than it was back in May, the last time that the company reported, but remains substantially higher than the S&P 500’S P/E ratio. Even so, based on the strength of the housing market this year, Home Depot still looks well placed to maintain its earnings growth.

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