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Should You Buy Home Depot (HD) Stock Ahead of Q2 Earnings?

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Shares of Home Depot (HD - Free Report) opened lower Friday just a few trading days before the home improvement retailer is set to release its second-quarter financial results. Home Depot stock has lagged the S&P 500 over the last six months, but the company’s business remains strong. So let’s take a look to see if investors should consider buying HD stock ahead of its Q2 earnings release. 

Overview

Home Depot is one of the world’s largest home improvement companies. The firm reported sales of $100.9 billion in fiscal 2017, which crushed rival Lowe's (LOW - Free Report) and its $68.6 billion. In the first quarter, Home Depot posted lower-than-expected quarterly revenues, but its same-store sales were encouraging.

The retailer’s comp sales jumped 4.2%, while U.S. comps popped 3.9%. For some growth perspective, Target (TGT - Free Report) saw its comps climb 3% in its most recent quarter, while Walmart’s (WMT - Free Report) U.S. comps climbed just 2.1%.

Home Depot also cited the not-so-warm start to the spring as a major reason it missed top-line estimates. Plus, the company expects its fiscal 2018 sales to surge by 6.7% with comp sales projected to climb by 5%. Meanwhile, HD reaffirmed its full-year earnings guidance and expects its earnings to soar by 28%.

Investors should also note that Home Depot operates one of the retail industry’s most profitable businesses. The Atlanta-based company boasted a 14.4% operating margin over the past year, which topped Lowe's 9.4% and crushed Walmart and Target, which posted margins below 6%.

Price Movement 

Home Depot has seen its stock price climb nearly 70% over the last three years, which outpaces the S&P 500’s roughly 37%. Over the last 24 months, shares of HD have climbed over 43%. However, over the last six months, HD stock is up around 7% and falls just behind the S&P’s roughly 8% climb.

 

Valuation

Moving on, HD is currently trading at 20.2X forward 12-month Zacks Consensus EPS estimates, which marks a discount compared to its industry’s 27.8X. Furthermore, over the last year, HD has traded as high as 23.5X and as low as 18X. Home Depot is also currently trading directly at its one-year median and not too far above its five-year median of 19.9X. Therefore, HD’s valuation is hardly stretched at the moment.

 

Outlook

Home Depot is expected to see its Q2 revenues jump by 6.7% to hit $29.98 billion, based on our current Zacks Consensus Estimate. Looking ahead to the full year, HD’s revenues are projected to surge by nearly 7% to reach $107.82 billion.

At the bottom end of the income statement, Home Depot’s adjusted quarterly earnings are projected to surge over 26% to $2.84 per share. The home improvement retailer’s adjusted fiscal 2018 earnings are expected to climb by nearly 27% to $9.46 per share. 

Bottom Line

Home Depot has earned one quarterly and one full-year downward earnings estimate revision within the last 30 days, while seeing no positive changes. However, Home Depot has an excellent management team that has helped it top our quarterly earnings estimates for almost seven years in a row.

The company is set to report its quarterly financial results before the market opens on Tuesday, August 14. And it looks like investors might want to consider Home Depot stock based on its earnings growth outlook and strong core business fundamentals.

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