To The Moon

Home Depot, Inc $Home Depot(HD)$ reports Q2 FY2022 earnings before market open on Tue Mar 17, with EPS expected to be $3.65 (–5.4% year-on-year, y-o-y) and revenue estimated to reach $36.47 billion (–2.7% y-o-y).

Fundamentals Advantages

The world’s largest home-improvement retailer based by revenue (2021 total sales was US$151.2 bil) operates 2,317 warehouse-style stores in US, Canada and Mexico, offering more than 30,000 products in store and 1 million products online. With economies of scale, wide selection of products, brand recognition and good relationship with suppliers, it has managed to keep cost low, and gained customers’ loyalty. Thus, it has a deep and wide economic moat that keep it ahead of its largest competitors, Lowe’s $Lowe's(LOW)$ , Ace Hardware and even Amazon.

Home Depot Key Financials, source: HD

Rising home prices in the US (average home price rose 14.6% in 2021) also helped HD, as homeowners are more likely to embark on D.I.Y home improvement projects, and get their supplies from HD, rather than buying new homes.

Reflecting this economic moat and favourable business conditions, HD has a healthy 5-year average EBIT margin of 14.7% and net income margin of 9.7%, all above sector medians by 35-60%. It has also been generating a lots of cash and rewarding shareholders. In 2021, HD generated $16.6 bil operating cash flow, and returned over $21.0 bil to shareholders, in the form of $14.8bil in shares buyback and $7bil in dividends.

Home Depot - Company of Doers source: HD, Michael Moger

Key Risks

A combination of macroeconomic factors: ongoing high inflation, FED rate hikes to combat it and supply chain disruptions, affecting availability of products due to geopolitical conflict in Russia and Ukraine and COVID-19 restrictions in China are key risks facing HD. Supply chain restrictions are the least of HD concerns as less than 20% of its products are sourced from China and Europe.

The biggest risk is high inflation slowing the US economy and triggering a recession. This in turn could lead to drop in housing prices, and consumers cutting down on discretionary spending including putting off home renovations and improvement projects.

This has already been felt by HD, with the stock price decline since the start of 2022. While partly this can be attributed to the sell-off in the broader markets, there is already sign of slowing earnings and revenue growth as forecasted in Q1 2022.

EPS is forecasted to rise in low single digit percentage in 2022, rather than the exceptional +30.1% increase last year. Analysts surveyed by Bloomberg have also forecasted only about a 5% increase in revenue for 2022. In some quarters such as the upcoming one, reduction in EPS and revenue y.o.y are forecasted.

To use baseball analogy, while Home Depot might no longer hit ‘home runs’ (double digit EPS growth) of 2021, its ‘singles' or single runs (single digit EPS growth) in 2022, where it is still growing, is profitable and paying solid dividends would continue to make it a fundamentally sound company to invest in.

Next we would review the Technicals to see if the price is right to enter or add positions to the stock.

Technicals

Based on longer term Weekly chart of HD, price has traded around three major support and resistance zones (green, orange, read coloured parallel zones), going back to 2018. Exception was the weeks during the COVID-19 pandemic rapid drop and recovery in the first half of 2020. After a multi-year uptrend consistent with bull market, price is now on a downtrend that started in Jan 2022 (see blue lines). These longer trend price action would provide the context of how much price in shorter term would move, especially around earnings where bigger swings are expected.

Weekly chart HD

Zooming in on Daily chart of HD could help us identify possible price movements post earnings and target entry and exit prices.

Daily chart HD

If earnings beat and positive forward guidance, price might rise to meet 50 MA around $309.91 (+4.69%). Price might react bullishly to reach the mid-point of the top price zone (green colour) at $329.32 (+11.12%) if there is exceptional earnings beat and other upside surprise.

If earnings miss and poor forward guidance, price might drop to $278.4 (-5.82%), mid-point of the bottom price zone (red colour). If there is unexpected poor earnings or guidance, price drop might accelerate to the bottom of the price zone at $264.36 (-10.70%).

I would likely wait until post earnings and see the price action of $Home Depot(HD)$, before looking to initiate positions in the stock.