Amid an unprecedented decline in the housing market and a significant slowdown in consumer spending, Home Depot (NYSE: HD) is in the unenviable position of being a housing-dependent retailer. Not surprisingly, analysts are skeptical ahead of the company's second-quarter earnings report, which is slated to hit the Street next Tuesday, August 19, ahead of the opening bell.
According to Thomson Financial, analysts are expecting HD to report a profit of 61 cents per share for the recently concluded quarter. During the past year, the company's performance in the earnings spotlight has been mixed. First Call reports that Home Depot has exceeded earnings estimates in two of the past four quarters, and fallen short of the Street's mark in the other two reporting periods. Its second-quarter report a year ago was one of the upside surprises; HD beat expectations by five cents per share last August.
However, it doesn't look like brokerage firms are banking on another Street-beating quarter. There have been 3 downward revisions to HD's estimated annual earnings, compared to just 1 upward revision (per First Call). Meanwhile, the average 12-month price target on the shares is $29.53. This target is a premium of 8.6% to the stock's closing price Thursday, but it represents a discount of more than 23% to HD's current annual high. In other words, analysts' expectations for the stock are rather low.
Considering this wary attitude, it should come as no surprise that the majority of Home Depot's analyst rankings are skeptical "holds." In total, Zacks reports 5 "strong buys," 8 "holds," 1 "sell," and 2 "strong sells." While this configuration is hardly a ringing endorsement, it does leave HD with ample opportunity to benefit from potential upgrades.
And HD could attract some bullish attention, since the stock is showing signs of technical strength recently. The Dow component has shed 17% during the past 52 weeks, but it's fast approaching breakeven on a year-to-date basis. From its mid-July nadir of $20.76, the equity has galloped 31% higher, and pulled its 10-day and 20-day moving averages into a bullish cross. In fact, the shares of Home Depot are poised to finish this week atop their longer-term 20-week moving average for the first time since mid-May.
Despite this upswing on the charts, option traders are mildly pessimistic ahead of the earnings report. During the past 10 days, HD has racked up a put/call ratio of 1.03 on the International Securities Exchange (ISE). This indicates that traders are displaying a slight preference for puts on the retailer, and it's also worth noting that option volume on the ISE has been more bearishly skewed just 28% of the time during the past year.
Short sellers are also skeptical, with short interest on the stock rising by 8.4% during the most recent reporting period. At HD's average daily volume, it would take about 4 days for all these bearish bets to be repurchased.
Overall, the pessimistic sentiment toward HD is encouraging to see ahead of earnings. In the event of a weaker-than-expected report or soft forward-looking guidance, the shares are unlikely to be smacked by a large-scale unwinding of optimistic bets. (Of course, the shares could still sell off if earnings disappoint; however, technical support could put the brakes on a major decline.) Plus, if the retailer can manage a positive surprise, there's ample opportunity for a short-squeeze rally, or a bullish boost from brokerage firms. In any event, this stock is definitely one to watch next Tuesday.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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