Home Depot Earnings: Can Company Follow Up Strong Q2 Results?

Home improvement retailer Home Depot reports third-quarter earnings before market open on Tuesday, November 13. Here’s a look at what might be expected from its quarterly report. SEO Title: Home Depot Earnings Preview: What Might Be Expected for Q3?

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Home improvement retailer Home Depot (HD) reports before market open on Tuesday, Nov. 13. 

For Q3, HD is expected to report adjusted EPS of $2.26 on revenue of $26.26 billion, according to third-party consensus analyst estimates. In the same quarter last year, adjusted EPS came in at $1.84 on revenue of $25.03 billion.   

The last time the company reported, it beat top and bottom-line estimates as seasonal sales rebounded from prolonged cold that negatively impacted spring sales at the start of the year. In Q2, comp sales were up 8% year over year, compared to a 4.4% increase in Q1. The biggest driver was the increase in customer transactions, which went from a 1.3% decline in Q1 to a 3.1% increase in Q2. 

Now that the seasonal lumpiness from the first half of the year is behind HD, analysts and investors are likely to be looking to see what normal performance  could be like for the back half of the year. With the last report, management said they expect year-over-year comp sales growth of 5.3%.

State of the Housing Market

On last quarter’s call, CFO Carol Tomé said that “We continue to expect strong economic growth with the backdrop of a healthy home improvement environment.” Now that there’s been a few more months of housing data, investors might get an idea tomorrow if that’s still the way management is feeling. 

Management cited continued home price increases, rising wages, low unemployment, and high consumer confidence as some of the reasons for their optimism. Not much has changed regarding those metrics over the past three months. However, affordability issues have been a factor that analysts see slowing demand. 

While increasing home prices can be good for those on the selling end, it can make it harder for homebuyers. The chart below shows the S&P Case-Shiller U.S. National Home Price Index has continued to climb to new highs, recovering well past post-recession lows from early 2012. The most recent report showed a slight slowdown as home prices were up 5.5% year over year, compared to 5.9% the month before. 

Home Prices. The chart above shows the year-over-year percentage change in the S&P-Case Shiller U.S. National Home Price Index. The latest reading dipped below a 6% increase, but home prices have maintained increases of 4% to 6% for several years now. TD Ameritrade clients can access economic data on the Fundamentals tab on the thinkorswim® platform. Data Source: Standard & Poor’s and Case Shiller. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Freddie Mac pointed to higher mortgage rates as the main factor in the slowdown in home price growth. According to their latest mortgage market survey, mortgage rates just hit seven-year highs. Last week, the 30-year fixed rate mortgage was at 4.94%, compared to 3.9% the year before. 

Meanwhile, existing home sales have continued to drop, posting their sixth straight month of declines in September. In addition to tight inventories and rising home prices, some of the factors blamed for those continued declines include rising material costs, as well as land and labor shortages. 

Home Depot Options Activity

Around HD’s earnings release, options traders have priced in a 4.5% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 47th percentile as of this morning, not too high ahead of tomorrow’s report. 

Bouncing Back. After peaking at an all-time high of $215.43, HD has pulled back a bit amid heightened market volatility and a string of weak housing data. At the end of October, the stock bounced once it got down to the $170 area, which was a major level of support earlier in the year. It has rebounded about $15 since then and shares are down just over 1% year to date. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

In short-term trading at the Nov. 16 monthly expiration, calls have been active at the 190 and 195 strike prices. On the put side, trading has been concentrated at the 185 and 187.5 strikes. Volume over the next month of weekly expirations has been pretty light overall. 

Looking at the Dec. 21 monthly expiration, activity on the call side has mostly been right around the money, with higher volume at the 185, 190 and 195 strikes. For puts, recent volume has been pretty light, although there is a decent amount of open interest at the 175 and 180 strikes. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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