After Q2 Earnings Beat, Should You Buy Home Depot (HD) Stock?

This morning, Home Depot HD reported results from its second quarter of 2016.  The home improvement retailer beat earnings estimates by $0.01, posting EPS of $1.97 for the quarter.  Along with the bottom line, Home Depot surpassed our sales estimate by a slim margin, and it posted revenues of $26.437 billion.  The beats were thin, and the stock lost about 0.64% today, so is Home Depot stock still a buy?

The company is heading in the right direction on the sales front, albeit at a slower pace.  According to Forbes, same-store sales grew at the slowest rate (5.4%) in nine quarters.  Comparable store sales increased by 6.6% compared to Q2 of 2015, but they still grew at a slower pace compared to the comps growth that the company has experienced over the last 10 quarters.  Sales guidance remained consistent, with revenues growth of 6.3% forecasted for this year.    

The bottom line, on the other hand, did see improved guidance, with EPS expected to grow 15.6% year-over-year, up from its previous estimated growth rate of 14.8%.  Compared to the first half of 2015, HD reported a 15% increase for operating income over the first two quarters of 2016.  This is mostly attributable towards higher sales numbers coupled with only 2.6% growth in total operating expenses over that time frame.  As gross profits increase, more of those dollars trickle down to the bottom line since operating expenses grow at a slow rate.  This makes the stock a very attractive prospect to hold onto for the long run, especially since it has a consistent record of growing sales over time.

Home Depot has delivered massive sales numbers over the years, and this has helped it to become a cash flow giant.  The company has shown dedication towards delivering returns to shareholders through dedicating billions of dollars towards share buy-backs every year.  The home improvement retailer has also done well in increasing its quarterly dividend every year for over 7 years.  The stock currently yields about 2%, which isn’t exactly impressive, but because of the stock’s strong free cash flows generated, it stands to keep increasing its cash payout per share significantly in the years to come.   

Home depot definitely looks like a worthy buy for the long run, but there’s reason to bet on the stock in the short term as well.  Home Depot stands to benefit from the bullish housing market, and this industry has a strong relationship with sales in the home improvement market.  Existing home sales are up 5% year-over-year in the first half of 2016, and if the pace does pick up, it is possible that Home Depot will benefit from this trend.

HOME DEPOT Price, Consensus and EPS Surprise

HOME DEPOT Price, Consensus and EPS Surprise | HOME DEPOT Quote

Furthermore, HD has consistently topped our EPS consensus estimate for several straight quarters, and this part of why the stock has kept going up over the last half-a-decade.  Pay attention to estimate revisions and rank changes for Home Depot over the near term.  Right now, the stock is a Zacks Rank #2 (Buy).

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