Home Depot (NYSE: HD ) isn't headed into its Tuesday morning earnings report on the firmest of footings. Although HD stock is now up nearly 20% from its late-December low - regaining roughly half of what was lost during the fourth quarter of last year - a slowdown in U.S. home purchases and a projected slowdown in remodeling spending both continue chip away at the recent bullish sentiment surrounding the stock.
It's possible that slowdown is only temporary, setting the stage for a solid 2019 regardless of how the home improvement retailer fared last quarter.
Even so, oddly high expectations for the recently completed quarter could readily upend Home Depot stock before home purchase and redecorating spending growth are decidedly rekindled.
Home Depot Earnings Preview
Blame the government shutdown, mostly, along with the weather, higher interest rates, tariffs and a relatively (compared to 2017) tame hurricane season. For that matter, blame the calendar too. Like its rival Lowe's Companie s (NYSE: LOW ), Home Depot's quarter ended in late January, meaning it suffered the entirety of the record-breaking government shutdown in one single quarter.
All of these are factors that impact the industry's top and bottom line to be sure. And, some analysts believe that's what happened.
"Home Depot and Lowe's face tough year-over-year comparisons in Q4 that included hurricane-related sales and a strong year ago December that was negatively impacted by weather in 2018," explained Wells Fargo in front of the fourth quarter print adding "January (which is a smaller month) could also see impacts from the lengthy government shutdown (and associated lower consumer confidence), and less favorable weather that may have resulted in traffic/sales shifting to Q1."
And yet, the analyst community hasn't exactly dialed back its collective outlook. As of the most recent look, the pros are calling for revenue growth of 11.3% to push its top line up to $26.6 billion, driving per-share profits up from a year-ago figure of $1.69 to $2.16 per share of HD stock for the recently-completed quarter.
Same-store sales should be up on the order of 5% , in line with the past couple of quarters.
Perhaps factors like the weather and the government shutdown aren't as hard-hitting as presumed. Indeed, despite demonstrable headwinds, Stifel believes "There was some softness in late 2018 with the stock market decline, higher rates, tariff talks," but still acknowledges "overall demand appears intact" for Home Depot's goods.
Rebound in the Works?
The mixed, confusing message isn't a new one.
Even before the government shutdown stopped official reports of new home sale activity from being posted, their growth pace was slowing, and by some measures shrinking. The slowdown has persisted too. In January of this year, according to data from Redfin (NASDAQ: RDFN ), sales of new houses fell 8% year-over-yea r. Sales of existing homes, which isn't published by the federal government and continued to be tracked through the shutdown, fell 1.2% last month to also extend a period of lethargic interest.
Housing starts are also leveling off , suggesting waning demand, and crimping supply even if demand had remained firm.
The flipside: A recent report jointly pieced together by Wells Fargo and L.E.K. Consulting suggested "Concerns of a 2019 downturn in housing screen as overblown, with housing starts likely to show steady growth in the intermediate term." The Joint Center of Housing Studies at Harvard University also recently opined that remodeling spending would grow to the tune of 5.1% in 2019 .
As for the potential impact of higher interest rates, JPMorgan analyst Christopher Horvers recently penned "Given the importance of rates to housing, this policy change [less hawkishness, more dovishness] certainly cannot be dismissed. Indeed, mortgage rates are 50 basis points off highs, which could lead to housing turnover and pricing better than previously feared and let the category grow longer."
Another noteworthy development that bodes well for HD stock is January's stunning 25% increase in lumber prices , largely erasing last year's tumble.
On balance, the data points to a turnaround. The brewing turnaround, however, will do little to help Home Depot's pressured fourth quarter. Investors, however, will likely struggle to rectify all the disparate ideas.
Looking Ahead for HD Stock
It's possible, and even likely, that investors have already conceded Home Depot's fourth quarter numbers are a coin toss at best, and will be a relative disappointment at worst. They've been buying HD stock anyway, looking at what lies ahead for the full year.
To that end, analysts are calling for full-year sales of $108.4 billion, up 7.4% from 2018's projected sales, and per-share profits of $9.80, up from 2018's anticipated $7.46. Tuesday's full-year report should also be accompanied by its first 2019 outlook.
Guidance that comes up short of current estimates could do more damage to the recent rally from HD stock than missing Q4 estimates might.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com , or follow him on Twitter , at @jbrumley.
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