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Home Depot earnings preview: Revamping homes during a pandemic

Home depot

Home improvement retailer Home Depot will report its earnings next Tuesday and shoppers who sought to improve their homes during lockdown are expected to have lifted the firm’s revenues.

Sales for the second quarter are expected to come in at $33.31bn, up 8% from the $30.84bn the company reported a year ago, while earnings are expected to end the three-month period at $3.38 per share, up 6.6% from an EPS of $3.17 the company reported during the same period in 2019.

Home Depot shares have seen interesting gains since the pandemic struck the US, with shares of the home improvement giant soaring 30% – trading at $281.66 as of yesterday – higher than the 4.5% return the S&P 500 index delivered during that same period.

Also read: Home Depot Vs Lowe’s: Which firm will dominate lockdown home improvements?

home depot shares 1
Home Depot (HD) YTD performance vs. SPX/LOW/DJIA – Source: Koyfin

Analysts estimates for Home Depot’s second-quarter earnings report

This Atlanta-based big-box retailer has benefitted from increased demand resulting from lockdowns, as customers took advantage of time on their hands to renovate their properties.

A persistent virus outbreak in the US provides a longer-than-expected tailwind for Home Depot, especially in the states where the virus has resurfaced strongly such as Texas and Florida.

Gardening products and do-it-yourself home improvement kits, have seen higher sales volumes during the pandemic, while the company has successfully adapted to social distancing restrictions, implementing curbside pickups and other delivery alternatives.

In the last four quarters, Home Depot has managed to beat Zacks.com earnings’ estimates by 0.8% on average.

What next for Home Depot stock?

home depot (HD) shares 2
Home Depot (HD) price chart – Weekly candles feat. RSI & volume – Source: Koyfin

Home Depot shares have broadly risen since 2013, with the stock trading above its 200-day moving average for the most part of these last seven years, which points to the strength and resilience of its business model and financial performance.

In the last few months, the stock rose rapidly after quickly rebounding from their March lows, although they are now trading above this long-dated upper trend line (above), while also stretching 24% above their 200-day moving average.

This overextension is a factor to keep in mind, as it is the first time the stock trades at such a far-from-the-mean level since 2018 and these stretches have often been followed by sharp reversions to the mean once the momentum fades.

home depot shares 3
Home Depot (HD) price chart – 1-day candles feat. RSI & volume – Source: Koyfin

Meanwhile, the one-day relative strength index is signaling overbought at the moment and the price action since May has been compressing within a tighter range, forming a potential rising wedge, although the stock price has recently broken through it – at least temporarily.

Traders should be especially cautious ahead of this earnings report, as a disappointing outcome for Home Depot (HD) could trigger a sharp correction, possibly sending the stock down to its short-term moving averages.

That said, it is unlikely that the stock will see a downward momentum beyond those levels, as this home improvement retailer continues to be one of investors’ favorite coronavirus stocks.

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Alejandro Arrieche

Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.