Shares of the Atlanta-based specialty retailer moved over 1% to the upside in pre-market trading Monday morning, recovering from a steep slide to begin August that razed many retail stocks and reeled in Home Depot off of its all-time highs in July.
With Walmart (WMT) encouraging optimism on U.S. consumers as of late, and real estate remaining relatively healthy, there is reason to stand alongside the retailer.
"Underlying drivers for the category appear to remain in place, and could re-strengthen, given a recent plunge in mortgage rates, moderating, albeit still climbing home values, and overall healthy consumer indicators," Oppenheimer analyst Brian Nagel said. "HD marks a now discounted, decidedly high quality operator."
Analysts are expecting $3.09 in earnings per share for the coming quarter, a slight pickup from a weather-affected quarter in the spring. Meanwhile, sales are expected to get a significant boost into the summer sales season, with the consensus coming to $31 billion.
"The unquestioned leader in home improvement supplies, we like Home Depot for its consistent same-store sales performance, ability to gain market share and improve margins, and its business model that is relatively immune from Amazon (AMZN) -like pressures," Jim Cramer's Action Alerts PLUS team said ahead of the release, citing operating margin gains and strong 2020 sales guidance as reasons to remain a long term holder. "Home Depot is a cash-generating machine. Making good use of its cash flows, the company recently authorized a 32% increase to its quarterly dividend (which puts the yield ~3.0%) as well as announced a $15 billion share repurchase program."
One key factor being possibly overlooked ahead of earnings is Home Depot's favorability with the home improvement and construction industry as economists eye new projects.
"Home sales are running at a pace similar to 2015 levels - even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country," said National Association of Realtors chief economist Lawrence Yun said. "Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices."
While declines in existing home sales are not initially encouraging especially as interest rates remain low, the possibility of new home construction and refurbishing of homes that homeowners dwell in for longer periods of time could add optimism.
That is particularly so given Home Depot's pole position in professional home improvement and construction work.
"Consumers love Home Depot - but more importantly, contractors do, and Lowe's (LOW) , under the incredibly good Marvin Ellison, has not been able to crack the hold that Home Depot has on the pros," Action Alerts PLUS portfolio manager Jim Cramer commented.
Still, with the retailer feeling some pressure, albeit far less than other sectors in retail, from tariffs and macro pressures not unanimously positive, many are advising caution ahead of the print.
"We see more downside than upside risk for HD and LOW results, guidance and stock performance upon 2Q19 earnings reports on Tuesday," Wedbush analyst Seth Basham said. "Declines y/y in home improvement retail sales in May and June, softer category sales growth projected by our leading indicator model, decelerating growth at select home improvement retail category peers, reports of slowing growth and retailer destocking from suppliers and unfavorable weather point to weak 2Q19 comps at HD and LOW."
As such, he expects same store sales to sink and temper any share reaction that the strong consumer could have encouraged optimism on.
"HD and LOW may also reduce FY19 comp guidance by ~1% and could also trim EPS guidance," he added. "Slowing economic growth based on PMI data and rising costs to the consumer from tariffs add pressure to the 2H19 sales outlook."
As such, he advised that the buying opportunity on either stock is much more likely to arise after the earnings release rather than ahead of it.
"Should investor expectations reset with 2Q19 results, this could create an attractive buying opportunity for HD and LOW for those who believe that the trade war will dissipate and that the housing and economic cycles still have legs," Basham concluded.
With Home Depot approaching on Tuesday morning and Lowe's leading the market headlines for Wednesday, it will be crucial to watch the remaining WATCH acronym components and their contemporaries closely this week.For some of the key levels presented in charts over the past month on Home Depot, click here.