Analysts and armchair economists like to treat Home Depot (HD, Financial) like America’s prize housing bellwether. The hope there is presumably that home improvements and ambitious expansions beget property sales and improved consumer confidence. Over the past few weeks, that parallel has drawn a whole new meaning.
Namely, Home Depot and the U.S. housing market are both pretty flaky.
There is no denying America’s housing situation is getting better. Last month, there were 1.21 million house starts – skating past expectations of 1.18 million. That is great news for the wider economy, but on the flip side, permits for future construction dipped in the second quarter of 2016 and investment in residential builds has contracted.
See what I mean? Not bad, but nothing to get overly excited about. Well, that lackluster rollercoaster ride perfectly captures the mood of Home Depot’s second quarter report.
On Tuesday, the world's largest home-improvement retailer posted yet another decent quarter. Total revenue shot up 6.6% to hit $26.47 billion, narrowly beating Wall Street’s forecast of $26.4 billion. Online sales surged 19%, global same-store sales rose 4.7% and U.S. stores posted a sales increase of 5.4%.
All in all, that performance helped the company to beat earnings by about a penny with $1.97. For reference, that represents a 15.8% rise in earnings versus twelve months ago. All in all, that sounds like a stellar quarter, right? Well, investors are not so sure.
Shares only rose by a single point off the back of Tuesday’s report – and they actually fell about two percent after hours. If you pick apart the numbers, it is not hard to see why.
Yes, Home Depot is growing. But the truth is, analysts were justifiably hoping for a lot more this quarter. Same-store sales might be up year-over-year, but they have actually fallen across 2016. Pair that against the seasonal buying habits of DIY cowboys and this narrative does not bode exceptionally well for the company – especially when you look at its competitors.
Shares in Lowe’s (LOW, Financial) have shot up over 7% this summer, off the back of much-needed cost-cutting measures, buybacks and the very shrewd acquisition of Canadian home improvement giant Rona. That increase in value trumps the S&P 500’s 6.5% rise and analysts are anticipating even bigger things from Lowe’s across the second half of 2016. Meanwhile, Home Depot’s stock has only increase by around 3.2% this summer.
At the end of the day, things are going okay for the company. It has lifted its full-year EPS outlook from 14.8% to 15.6% and is predicting revenue to grow by 6.3%. Yet bearing in mind that Home Depot has got a few decent tailwinds pushing it forward at the moment, it is not unreasonable to expect a little bit more.
That is why investors are struggling to get excited about Home Depot this year. The company has already suffered a few pullbacks this year in terms of share price – and if Tuesday’s second quarter report is not enough to restore confidence in Home Depot, it is tough to imagine what will.
The company cannot do a whole lot to improve its efficiency or cut costs, so it looks like improved growth will ultimately hinge on a wide array of macroeconomic factors. Accelerated activity within America’s housing market and low commodity costs that will free up discretionary income for consumers will be vital in Home Depot’s battle to catch up with its competitors.
Unfortunately, with housing performance up in the air and a federal funds rate hike on the horizon, it is difficult to say whether these crucial external factors are going to play ball. If you are looking to invest in the short term, that leaves plenty of room to worry about Home Depot. Yet even value investors might want to tread carefully in the months to come.
Make no mistake, there will be growth. But chances are it will fail to impress.
Disclosure: I do not own shares in any of the companies mentioned within this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
