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Home Depot Earnings Preview: Sales Growth In Focus As Stock Soars

* Reports Q4 2019 results on Tuesday, Feb. 25 before the market open

* Revenue expectation: $25.77 billion

* EPS expectation: $2.11

The largest home-improvement chain in the U.S., Home Depot (NYSE:HD), reports fourth-quarter earnings tomorrow, testing investors’ faith in its expansion after propelling the stock to a record high this year.

Betting on this big-box retailer makes sense at a time when the U.S. economy appears to be chugging along and consumer spending is so far showing no sign of weakness. This creates a supportive backdrop for homeowners, allowing them to feel confident about spending more on their homes, though lower PMIs reported last week are a concern as the spread of the coronavirus starts to take a toll on global growth.

However, gains in home prices accelerated in the last quarter, boosted by a decline in borrowing costs. That usually means home-improvement spending picks up because more people see their properties as investments worth enhancing.

This type of macro environment should be sufficient to allay concerns that HD’s sales growth has peaked following a couple of weak quarters, hurt by lumber deflation and the U.S. trade war with China that increased costs for retailers.

Home Depot shares tumbled more than 5% when the company reported Q3 earnings in November. Though comparable sales still rose a robust 3.6% from a year earlier, they were well below what analysts were expecting.

Home Depot Weekly Price Chart

Home Depot Weekly Price Chart

In December, Home Depot provided a forecast for this year that was also slightly lower than analysts’ expectations: comparable sales should grow between 3.5% to 4%, with an EBIT margin softening to 14%. But despite this expected deceleration, industry trends remain solid, albeit not as robust as they were 18 months ago.

The continuing strength in demand for HD products has helped its shares recover quickly from the slump they faced post Q3 earnings and they closed at $245.34 on Friday after touching a record high of $247.36 the same day.

The company has experienced one of the strongest periods of expansion in its history, delivering year-over-year comparable sales growth for 33 straight quarters. Quarterly sales growth has been more than 4% for the bulk of that time, indicating that this big-box retailer is pursuing an extremely successful growth strategy.

Home Depot is also one of the retailers best-positioned to survive an ongoing onslaught by e-commerce disruptors, such as Amazon.com (NASDAQ:AMZN). The reason: management figured out early on how to thrive in this challenging environment. With 90% of Americans already living within 10 miles of a Home Depot outlet, rather than opening new locations, the company instead focused on upgrading its existing store base with better technology and e-commerce fulfilment capabilities.

That’s a remarkable performance and offers a compelling reason to buy Home Depot stock, especially when the company pays a generous $1.36 a share quarterly dividend, for a yield of 2.2%, following a 32% hike last year. To support its stock price, the company also has a powerful $15-billion stock buyback program in place.

Bottom Line

The improving housing market, coupled with Home Depot’s strong growth momentum, should continue to support the retailer’s share price this year. As well, the company is a reliable dividend payer. Its quarterly disbursement has grown 380% over the past decade and, with a healthy payout ratio of 40%, there’s plenty of runway for it to continue growing. Any post earnings weakness should be taken as a buying opportunity.

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