Home Depot (HD) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.
Over the past month, shares of this home-improvement retailer have returned +5.7%, compared to the Zacks S&P 500 composite's +2.5% change. During this period, the Zacks Building Products - Retail industry, which Home Depot falls in, has gained 4.3%. The key question now is: What could be the stock's future direction?
While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.
Earnings Estimate Revisions
Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
Home Depot is expected to post earnings of $3.64 per share for the current quarter, representing a year-over-year change of -4.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -4.2%.
The consensus earnings estimate of $15 for the current fiscal year indicates a year-over-year change of -0.7%. This estimate has changed -1.2% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $15.61 indicates a change of +4.1% from what Home Depot is expected to report a year ago. Over the past month, the estimate has changed -2.6%.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Home Depot is rated Zacks Rank #3 (Hold).
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.
In the case of Home Depot, the consensus sales estimate of $39.27 billion for the current quarter points to a year-over-year change of +4.2%. The $157.58 billion and $162.86 billion estimates for the current and next fiscal years indicate changes of +3.2% and +3.4%, respectively.
Last Reported Results and Surprise History
Home Depot reported revenues of $43.18 billion in the last reported quarter, representing a year-over-year change of +0.6%. EPS of $4.67 for the same period compares with $4.65 a year ago.
Compared to the Zacks Consensus Estimate of $42.57 billion, the reported revenues represent a surprise of +1.41%. The EPS surprise was +2.86%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates three times over this period.
Valuation
Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.
While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Home Depot is graded B on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Bottom Line
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Home Depot. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.
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