Option Trade 
The Home Depot, Inc. (NYSE:HD) Calls 
Monday, 15th August, 2016

** OPTION TRADE: Buy the HD NOV 18 2016 140.000 call at approximately $3.20. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.30.

by Ian Harvey

August 15, 2016

The Home Depot, Inc. (NYSE: HD), a home improvement retailer, is scheduled to report its second-quarter results tomorrow, August 16. The company will post its quarterly numbers before the market opens, with the consensus calling for earnings of $1.95 per share, up from $1.71 during the same period last year.

In the preceding quarter, the company posted an earnings beat of 7.5%. Home Depot’s sales have beaten the consensus estimates for eight out of nine quarters. The retailer’s sales grew by 9% during 1Q16 to $22.8 billion. Analysts expected the company to generate sales of $22.4 billion.

Home Depot has benefited from a strong housing market, which is a big reason why earnings are forecast to climb 14.0% versus the same period last year. The stock has been trading steadily higher over the last year, but it appears to have hit a ceiling over the last month, which is most likely a result of the stock’s P/E rising to 24.0. If HD reports solid numbers, the stock is likely to break through recent resistance and resume its upward trend. Looking ahead, analysts forecast earnings will rise 16.9% for the full year, and by 13.5% next year.

The street has a slightly higher whisper number of $1.98, suggesting that analysts expect another solid beat from the company. With interest rates near historic lows, and expected to remain low well into next year, it is believed that there is plenty of upside left in the stock.

The stock is up a modest 3.6% on the year.

The Home Depot Inc. has a 52 week low of $92.17 and a 52 week high of $139.00. The company has a 50-day moving average price of $134.03 and a 200-day moving average price of $130.44. The stock has a market cap of $170.48 billion and a PE ratio of 24.07.

Why Home Depot?

Home Depot has been outperforming estimates, mainly gaining strength from its focus on improving customer experience, solid execution and persistent housing market recovery. Analysts remain hopeful about the company’s upcoming results given the robust guidance for fiscal 2016. Also, they expect its focus on developing merchandising tools and increasing investment in e-commerce to boost its top line and enhance market share.

In response to the evolving retail environment, where digital and physical stores go hand in hand, Home Depot remains keen on building its interconnected capabilities, as evident from the 21.5% growth in online sales and double-digit online-traffic growth recorded in the preceding quarter. Moreover, the company is on track to achieve its long-term dividend payout, share repurchase and return on investment targets, which highlight its financial strength.

Key drivers of sales

Home Depot’s 1Q16 sales were mainly driven by the 6.5% growth in same-store sales. The same-store sales growth in the first quarter was driven by a 4.1% rise in comparable store customer transactions and a 2.4% rise in the comparable average ticket. Transactions for tickets below $50 grew by 2.7% in 1Q16. Transactions for tickets above $900 jumped by 9.5% in 1Q16 driven by the purchases of appliances, roofing, sheds, and windows appliances.

Same-store sales for US stores grew 7.4% in 1Q16. Favorable weather contributed another $250 million to the US sales numbers. However, the 1Q16 net sales were adversely impacted by $196 million of currency headwinds caused by the continued strengthening of the US dollar.

Home Depot’s Mexico and Canada businesses recorded positive same-store sales in their native currencies for the 50th and 18th consecutive quarters, respectively, in 1Q16. Online sales grew by 21.5% in 1Q16 and contributed 5.7% of the first quarter sales.

The 9% growth in 1Q16 sales was higher than the 6.1% sales growth in 1Q15 but lower than the 9.5% growth rate in 4Q15.

Analyst Input

The Home Depot Inc. (NYSE:HD) was upgraded by Zacks Investment Research from a “sell” rating to a “hold” rating in a research note issued to investors on Tuesday.

According to Zacks, “In response to the evolving retail environment, where digital and physical stores go hand in hand, Home Depot remains keen on building its interconnected capabilities, which is expected to boost its top line, and enhance market share. However, intense competition from specialty and mass retailers and a soft economic recovery may prove deterrents, pushing back home improvement projects.

Also, the company’s significant exposure to international markets makes it vulnerable to currency fluctuations. Nonetheless, the company has been gaining from its focus on improving customer experience, solid execution and consistent housing market recovery. Further, the company is on track to achieve its long-term dividend payout, share repurchase and return on investment targets. Estimates have been stable lately ahead of the company’s second quarter earnings release. Also, the company has positive record of earnings surprises in recent quarters.”

Also, several other equities research analysts have recently commented on the company.

• Vetr raised shares of The Home Depot from a “hold” rating to a “buy” rating and set a $140.59 target price on the stock in a research note on Wednesday, April 13th.

• Deutsche Bank AG reaffirmed a “buy” rating on shares of The Home Depot in a research note on Thursday, April 14th.

• Jefferies Group upped their target price on shares of The Home Depot from $140.00 to $156.00 and gave the stock a “buy” rating in a research note on Friday, May 13th.

• JPMorgan Chase & Co. reaffirmed an “overweight” rating on shares of The Home Depot in a research note on Tuesday, May 17th.

• Finally, Telsey Advisory Group reaffirmed an “outperform” rating and set a $150.00 target price (up from $148.00) on shares of The Home Depot in a research note on Tuesday, May 17th.

One equities research analyst has rated the stock with a sell rating, eight have issued a hold rating and eighteen have issued a buy rating to the company. The Home Depot presently has a consensus rating of “Buy” and an average price target of $145.01.

Harvey’s Options Volatility Indicator

Conclusion

In recent years, Home Depot has been one of the best-performing stocks in retail, riding a bullish wave in the building materials and home improvement sector.

The leading home improvement retailer has boomed in recent years thanks to a growing housing market, which has led it and rival Lowe's to more than quadruple in the last five years. Home improvement retail offers the benefit of being protected from the growth of Amazon and e-commerce, as building materials are often big and heavy and cannot be delivered through the mail.

Unlike most retailers, Home Depot has also resisted opening new stores in recent years, choosing instead to add new services to current locations, invest in its e-commerce platform, and buy back stock.

Revenue has grown 30% since the recession as same-store sales and e-commerce growth have gone almost directly to the bottom line. Looking ahead, Home Depot is targeting revenue growth from $88 billion last year to $101 billion in 2018, and operating margin improvement from 13% to 14.5%. As a result, operating profits should grow at a compound rate of 9%, which should deliver healthy EPS growth when the company's share buyback program is factored in.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the HD NOV 18 2016 140.000 call at approximately $3.20. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.30.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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