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Investors Should Consider Home Depot (HD) Despite Q1 Sales Miss

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Shares of Home Depot (HD - Free Report) opened lower on Tuesday after the company reported its first quarter financial results. But while the home improvement retailer might have disappointed some investors, its performance, outlook, and current valuation are actually rather attractive.

Home Depot reported adjusted earnings of $2.08 per share, which marked a roughly 24.5% climb from the year-ago period and also topped our Zacks Consensus Estimate by 2 cents. The opposite end of the income statement is what left some investors nervous about Home Depot. The company’s Q1 revenues fell short of our $25.20 billion estimate, but did pop by 4.4% to reach $24.95 billion.

Clearly, a top line miss isn’t a good thing for Home Depot. With that said, if we dive a little deeper investors will see that there is a lot to be pleased with when evaluating Home Depot stock at the moment.

Quick Q1 Details

Despite the fact that Home Depot posted lower-than-expected quarterly revenues, the company’s same-store sales were encouraging. The retailer’s comp sales jumped 4.2%, while U.S. comps popped 3.9%. Both of those are relatively solid for a company of Home Depot’s size and age. Investors did likely compare Home Depot’s comp growth to the year-ago period when the company’s same-store sales climbed 5.5%, with U.S. stores up 6%.

There is however a somewhat obvious reason for this year-over-year decline that was out of Home Depot’s control.

The weather throughout most of North America—where a large chunk of its roughly 2,200 retail stores are located—has been rough, which means spring-based home improvement shopping was subdued. “We are pleased by the strength of our business despite a slow start to the spring selling season,” CEO Craig Menear said in a company statement.

Outlook

Home Depot now expects fiscal 2018 revenues will surge by roughly 6.7%, which is almost directly in line with our current estimate that calls for full-year sales of $107.62 billion. This marks a significant increase from the 4.6% full-year sales growth Home Depot projected in the prior-year period.

Meanwhile, the company projects its comp sales will climb by approximately 5%, which also tops Home Depot’s 2017 full-year same-store sales guidance in the year-ago quarter. Both of these estimates help underscore the fact that Home Depot’s first quarter ticket sales popped 5.8%, helping offset a 1.3% decline in overall customer transactions.

The Atlanta-based company also reaffirmed its full-year earnings guidance that calls a 28% surge to touch $9.31 per share.

Price Movement & Valuation

Investors also need to take a look at Home Depot’s recent price movement as well as its current valuation picture to help understand if the stock might be worth considering despite some Q1-based skepticism. 

Before Tuesday’s dip, shares of Home Depot were up roughly 19% over the last year, topping the S&P 500’s 13.8% climb. HD’s gains look even better compared to its peer group’s 9.1% decline—this group features both Lowe's (LOW - Free Report) and Fastenal (FAST - Free Report) . Investors should also note that Home Depot has crushed the S&P 500 over the last five years, up 145% compared to the index’s 68% climb.

Moving on, Home Depot is currently trading at 19.8X forward 12-months earnings estimates. Over the last year, HD has traded as high as 23.5X and as low as 18X. Coming into Tuesday, Home Depot was trading at a roughly 16% discount compared to where it stood in the middle of January.

Home Depot stock has traded at a premium compared to its industry’s average during the last year. The home improvement power’s stock is also currently trading a premium against Lowe’s—which is trading at 15.3X.

With that said, Home Depot has consistently traded at a premium compared to its largest direct competitor since May 2015. Therefore, investors clearly have reasons to value Home Depot’s future earnings over Lowe’s over the last few years.

Bottom Line

Home Depot might have fallen just a bit short of top-line estimates in the first quarter. But its growth was still solid and its 2018 outlook compares favorably against the same period last year. The company’s bottom line is also expected to expand at a healthy rate in 2018. Furthermore, HD’s current valuation appears to be fair, if not attractive.

Clearly, Home Depot stock is certainly worth considering, especially after its stock price dipped following its Q1 earnings release.

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