Tuesday, February 25, 2020

Are Investors Overly Optimistic About Home Depot?

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What’s happening: Home Depot, Inc. is scheduled to report its fourth-quarter results before the opening bell on Tuesday, February 25.

What happened: Shares of the largest American home improvement retailer surged to near record highs on Friday with investors expecting strong results for the fourth quarter.

Home Depot’s journey has, however, been a bumpy one. In fact, analysts made downward revisions to their estimates over the past three months and project declines in both revenue and earnings.

  • The consensus revenue estimate stands at $25.78 billion, representing a 2.7% year-on-year decline.
  • The estimate for earnings is $2.11 per share, down 6.2% from the same quarter in the previous year.

Why it matters: The consumer retail chain missed growth projections set by its management in the last two quarters. Home Depot lowered its fiscal 2020 guidance in November, sending its stock tumbling 12% to a four-month low.

CEO Craig Menear has tried to pacify market participants by saying that the shortfalls in the previous quarters did not result from weakening demand trends. Rather, he cited short-term issues like lower lumber prices for the miss. Menear mentioned that the company’s overall growth rate had been strong, after excluding these issues. Home Depot had indicated a return to growth during the fourth quarter.

Meanwhile, Target and other leading retailers have issued warnings of a slowdown in consumer spending during the holiday season. Although Home Depot’s business is not completely dependent on holiday sales, the company may still have suffered from customers scaling back their spending. Higher supply-chain costs associated with its ‘One Home Depot’ strategy are expected to have pressurized margins in the quarter.

On the other hand, Home Depot’s investments in frontend stores and automated lockers, along with its integrated strategy that connects online and offline channels, are helping the retail giant to achieve customer satisfaction and improve conversion rates. The company has also been focusing on improving its ecommerce capabilities and upgrading its current stores with better technology to provide a smoother customer experience.

Investors also love the company for its high dividend payouts. Home Depot has hiked its quarterly disbursement by 380% over the last decade.

What to watch: Investors will be keen to hear from management about strength in the home improvement sector and expect upward revisions in their forecast for fiscal 2020. Investor sentiment has also been driven by strength in the overall economy and key industry metrics, like home prices, an upturn in consumer spending in January and America’s aging housing stock, which suggest sales growth for Home Depot going ahead. Even slightly adverse news could cause weakness in the stock, which has already gained 10% over the past three months and is trading close to record highs.

The Markets Today

     

Investors will be watching US stocks today, with all the major indices losing around 3% on Monday.

Context: US stocks closed lower on Monday, after a jump in coronavirus cases outside China. News of the deadly virus spreading to other countries has put other major economies on high alert, adding to the woes caused by the massive disruption to business in China.

Details: After closing lower on Friday, US indices continued their downward momentum with the Dow shedding more than 1,000 points.

The last time that the Dow suffered such a massive loss was in 2018, when inflation worries hit Wall Street investors. The index had tumbled more than 4% twice within a week. The latest downtrend in the Dow has turned the index negative for this year, with a 2% decline year to date. The S&P 500 fell 3.35%, while the Nasdaq 100 lost 3.71%. Shares of Tesla plummeted around 7.5% as the company generates more than 10% of its sales from China and has production plants in the country.

The decline in US markets was followed by Asian and European markets, amid heightening virus-related worries. Most leading companies have warned that they may miss their outlook for the first three months of the year due to the coronavirus impact. The slowdown in demand for goods and services, along with closures of factories in China, is already hurting the global economy.

Till now, US stocks had not responded to the virus outbreak, given the strong earnings season, which had driven US indices to record highs in previous weeks. However, the surge in cases in South Korea and Italy have pressed the panic button. South Korea’s total number of infections surged to 893 on Monday. Italy cancelled public programs after reports of a rise in infections. China reported 71 new deaths and 508 new confirmed cases as of Monday.

Oil prices also dipped on fears of a decline in energy demand, as the global economy slows. The IMF issued a warning of the virus hurting global economic growth by 0.1% in 2020.

Why it matters: US markets are expected to recover slightly today, with stock futures pointing towards a higher open this morning. After the dismal performance of US stocks in the previous sessions, all eyes are on the S&P Case-Shiller home price index, FHFA house price index, CB consumer confidence index and Richmond Fed manufacturing index, scheduled for release later today

What to watch: The market will look at the major indices, with stock futures pointing towards a higher start. Preliminary estimates for the S&P Case-Shiller home price index call for a 2.8% rise in December, following November’s 2.6% gain. The FHFA house price index is expected to gain 0.3% in December, after having risen 0.2% in November.

Other Markets: Most European indices closed lower on Monday, with the UK 100, German 30 and French 40 down 3.34%, 4.01% and 3.94%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Mexico's gross domestic product, current account and economic activity as well as the US Redbook index.