* Reports Q4 2019 results on Tuesday 25 February before the market is open
* Revenue expectation: $ 25.77 billion
* EPS expectation: $ 2.11
The largest home improvement chain in the US, Home Depot (NYSE :), reports tomorrow in the fourth quarter, testing investor confidence in expansion after equities have moved to a record high this year.
Betting on this big-box retailer makes sense at a time when the US economy seems to be spinning and consumer spending has so far shown no signs of weakness. This creates a supportive background for homeowners, allowing them to be sure they are spending more money on their homes, although lower PMIs reported last week are a concern because the spread of the corona virus is starting to take its toll on global growth.
However, the rise in house prices accelerated in the last quarter, stimulated by a fall in financing costs. That usually means that spending on home improvement is improving because more people see their properties as worthwhile investments.
This type of macro environment should be sufficient to alleviate concerns that HD sales growth peaked after a few weak quarters, hurt by wood deflation and the US trade war with China that increased retailer costs.
Home Depot shares fell more than 5% when the company reported earnings for the third quarter in November. Although comparable sales still increased by a robust 3.6% compared to a year earlier, they were far below analyst expectations.
Weekly price chart Home Depot
In December, Home Depot made a forecast for this year that was also slightly lower than analyst expectations: comparable sales should grow between 3.5% and 4%, with an EBIT margin decreasing to 14%. But despite this expected slowdown, industry trends remain solid, although not as robust as 18 months ago.
The continued demand for HD products has contributed to a rapid recovery of the shares from the slump they faced after the third quarter and they closed $ 245.34 on Friday after a record high of $ 247 the same day, Had reached 36.
Strongest extension
The company has experienced one of the strongest periods of expansion in its history, with comparable annual sales growth for 33 consecutive quarters. The quarterly revenue growth was more than 4% for most of that time, indicating that this big-box retailer is following an extremely successful growth strategy.
Home Depot is also one of the best-selling retailers to survive an ongoing attack by e-commerce disruptors, such as Amazon.com (NASDAQ :). The reason: management discovered early on how to do it in this challenging environment. With 90% of Americans living within 10 miles of a Home Depot location, instead of opening new locations, the company instead focused on upgrading its existing store base with better technology and fulfillment capabilities e-commerce.
This is a remarkable achievement and offers a compelling reason to buy Home Depot shares, especially when the company pays out a generous $ 1.36 per quarter dividend, for a return of 2.2%, after an increase of 32 % last year. To support its share price, the company has also set up a powerful $ 15 billion share buyback program.
Bottom Line
The improving housing market, in combination with the strong growth momentum of Home Depot, should continue to support the retailer's share price this year. The company is also a reliable dividend payer. The quarterly payout has grown by 380% in the last decade and with a healthy payout ratio of 40% there is enough job to grow further. Any weakness after the profit must be seen as a purchasing option.
