Is Home Depot Stock A Buy Ahead of Q4 Release?

Home Depot (NYSE: HD) is scheduled to report its fiscal fourth-quarter results on Tuesday, February 23. We expect the company’s revenues to likely be in-line while earnings to beat consensus estimates. The home improvement leader has seen revenue and net income grow by double digits as millions of homeowners have found themselves spending substantially more time in their homes in 2020. The home improvement retailer has invested quickly and heavily to build out its digital capabilities to accommodate this demand surge during the pandemic. In fact, these capabilities could bring in customers even after the pandemic has run its course. Certainly, sales will not continue to grow at 20+% levels as seen so far in 2020, but the company will likely continue to benefit from its ongoing One Home Depot strategy and the acquisition of HD supply going forward.

Home Depot acquired HD Supply, a provider of maintenance, repair, and operations products in November 2020. This buyout is likely to boost the overall value of the business by adding new growth opportunities and pushing profit margins higher. Investors should be watching out for management’s detailed forecast about this acquisition when Home Depot announces its fourth-quarter results. Our forecast indicates that Home Depot’s valuation is $291 a share, which is around 3% higher than the current market price of around $283. Look at our interactive dashboard analysis on Home Depot’s Pre-Earnings: What To Expect in Q4? for more details.

(1) Revenues expected to be in line with the consensus estimates

Trefis estimates Home Depot’s Q4 2020 revenues to be around $30.4 Bil, almost in line with the consensus estimate of $30.6 Bil. Home Depot saw record sales growth in 2020 as it added over $15 billion year-over-year to its sales base and booked soaring profits through the first three quarters of the year. In addition, the company also reported a strong comparable sales growth of 18.3% in the three quarters of fiscal 2020. This compares to sales growth of only 3.0% during the same period last year. Particularly, the company saw double-digit growth in both customer traffic and average spending in Q3, and we expect this trend to continue in Q4 as well. That said, the increase in remote working may be longer-lasting, which will allow the company to serve those customers looking to build and maintain a home office beyond the pandemic. In addition, as a consequence of the pandemic, more people are deciding that owning a home is a better bargain than renting an apartment – which means more business for home improvement retailers.

2) EPS to be likely ahead of consensus estimates

Home Depot’s Q4 2020 earnings per share (EPS) is expected to be $2.63 per Trefis analysis, 2% higher than the consensus estimate of $2.59. Despite revenues growing substantially, the company’s operating margin of 14.2% came in lower than the previous year’s 14.7% (in the first three quarters of 2020), due to higher safety, labor, and supply chain costs related to Covid-19. However, the company’s operating income grew 14% y-o-y during this period. In addition, Home Depot generated $10 billion of net income since the start of 2020, compared to $8.8 billion in the prior-year period. It should also be noted that retailer’s digital sales increased by approximately 80% with customers picking up 60% of those orders in-store in Q3. This indicating that the company is able to save major costs of shipping items to the customer’s homes in pick-up orders, consequently passing on these savings to its bottom line.

For the full-year, we expect Home Depot’s net margin to grow slightly from 10.2% in 2019 to 10.5% in 2020. This coupled with an 18% y-o-y growth in Home Depot revenues, could lead to a rise of $2.4 billion y-o-y in net income to $13.6 billion in 2020. All this, resulting in a possible EPS increase from $10.25 in 2019 to around $11.83 in 2020.

(3) Stock price estimate higher than the current market price

Going by our Home Depot’s Valuation, with an EPS estimate of around $11.83 and P/E multiple of around 25x in fiscal 2020, this translates into a price of $291, which is 3% ahead of the current market price of roughly $283.

While HD stock may likely benefit post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Home Depot vs D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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