Options Trade – The Home Depot, Inc. (NYSE:HD) Calls
Monday, May 19, 2014

**OPTIONS TRADE: Buy the HD Aug 2014 80.000 call (HD140816C00080000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.50.

by Ian Harvey

May 19, 2014

Introduction

The Home Depot, Inc. (NYSE: HD) is set to issue its Q114 quarterly earnings data on Tuesday, May 20th, before the market opens. Analysts expect the company to announce earnings of $0.99 per share and revenue of $19.96 billion for the quarter. The Home Depot has set its FY15 guidance at $4.38.

Investors continue to expect the home-improvement retailer to post solid growth in earnings and revenue. Even though concerns about the strength of the housing market have started to surface in the investing community, Home Depot has managed to overcome downturns in the past.

Home Depot's growth record is extraordinary and shows the depth of its playbook. When the housing market had collapsed, Home Depot focused on giving desperate homeowners the tools they needed to try to stand out from their peers in selling their homes, as well as catering to customers who had to make do with their current homes rather than trade up. More recently, as the housing market has recovered, Home Depot's dual focus on contractors and do-it-yourselfers has helped give it the best of both worlds.

Earnings

Several factors to consider:-

• HOME DEPOT INC has improved earnings per share by 7.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, HOME DEPOT INC increased its bottom line by earning $3.75 versus $3.00 in the prior year. This year, the market expects an improvement in earnings ($4.43 versus $3.75).

• The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, HOME DEPOT INC's return on equity significantly exceeds that of both the industry average and the S&P 500.

• Net operating cash flow has slightly increased to $1,647.00 million or 3.51% when compared to the same quarter last year. In addition, HOME DEPOT INC has also modestly surpassed the industry average cash flow growth rate of -5.39%. • Regardless of the drop in revenue, the company managed to outperform against the industry average of 5.3%. Since the same quarter one year prior, revenues slightly dropped by 3.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

• In its most recent trading session, HD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.

Factors Influencing the Quarter

After a tough winter, spring gardening projects got delayed in many parts of the country. Yet the long winter could well make impatient homeowners attack projects with renewed enthusiasm as spring finally comes, and that could make Home Depot's spring season one to remember. Moreover, as Sears Holdings further loses its grip on its retail operations, Home Depot has the opportunity to poach its lucrative appliance business, adding to its dominance in the home.

Still, competition in the industry is fierce. To stay ahead of Lowe's and Sears Holdings, Home Depot has worked on modernizing its operations and giving customers all the tools they need to make orders efficiently. Integrating its online site with store operations has been a key priority, especially because almost a third of online orders get picked up at store locations and 10% of online orders come from within stores. Moreover, with a loyalty program aimed exclusively at contractors, building professionals get the added attention and service that make them return to Home Depot rather than go to Lowe's or other competitors.

Analysts Opinions

Analysts at BMO Capital Markets upgraded shares of The Home Depot from a “market perform” rating to an “outperform” rating in a research note last Friday. They now have a $90.00 price target on the stock, up previously from $82.00.

Also, the company has been the subject of a number of research reports:-

• On the ratings front, analysts at Jefferies Group cut their price target on shares of The Home Depot from $94.00 to $90.00 in a research note on Wednesday, May 14th. They now have a “buy” rating on the stock.

• Separately, TheStreet Ratings team rates HOME DEPOT INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate HOME DEPOT INC (HD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, notable return on equity, good cash flow from operations and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

One research analyst has rated the stock with a sell rating, seven have issued a hold rating and fourteen have given a buy rating to the company. The Home Depot has a consensus rating of “Buy” and a consensus target price of $87.83.

Conclusion

The company has a solid track record of posting better-than-expected numbers, and if it can continue that streak with a strong Q1 report the stock should be able to regain some upwards momentum. Home prices across the nation have been rising, which should lead to higher home remodeling and keep demand strong for retailers such as Home Depot. The stock’s earnings report is expected to come in above the consensus estimate.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the HD Aug 2014 80.000 call (HD140816C00080000) at or under $1.40, good for the day. Place a protective stop limit at $0.55 and a pre-determined sell at $2.50.



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