Option Trade
The Home Depot, Inc. (NYSE:HD) Calls
Monday, May 15, 2017

** OPTION TRADE: Buy the HD JULY 21 2017 160.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

The Home Depot, Inc. (NYSE:HD), the leader in the home-improvement retail space, is expected to report its first-quarter results before the market opens tomorrow, May 16. The company operates 2,278 stores across the US, Canada, and Mexico. The Wall Street consensus forecast calls for the former to show solid bottom-line growth, as well as a modest gain in revenue, with analysts forecasting earnings of $1.61 per share, up from $1.44 during the same period last year.

And the $23.72 billion in expected revenue would be up more than 4 percent year over year. Note that earnings per share topped consensus estimates by a penny or two in the previous two quarters.

The housing market remains solid, and the home improvement sector has enjoyed steady growth as a result with HD shares has trended steadily higher over the last six months.

 Analysts see Q1 earnings rising 11.8% year over year, and full year earnings growth of 11.6%. Home Depot has a good earnings track record, posting better than expected results 17 out of the last 19 quarters, and the two quarters it did not top estimates it posted results that were in-line with the consensus.

Home Depot is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings-with the most up-to-date information possible-is a pretty good indicator of some favorable trends underneath the surface for HD in this report.

Analysts expect another earnings beat, with the street having a whisper number of $1.64, which is three cents above the consensus. Another earnings beat will propel the stock higher, and push shares to a new record high.

The home-improvement giant isn't aggressively adding to its store base. While that puts pressure on existing stores to deliver all of the sales gains, Home Depot has consistently found ways to deliver on this score. Comps improved by over 5% in each of the last three fiscal years.

HD shares are up 16.8% on the year.

Technical indicators for HD are bullish and the stock is in a strong upward trend. The stock has recent support above $152.50 and has recent resistance below $158.15.

Home Depot has a market capitalization of $189.33 billion, a PE ratio of 24.40 and a beta of 1.09. Home Depot has a 12-month low of $119.20 and a 12-month high of $157.55. The stock has a 50 day moving average of $149.46 and a 200 day moving average of $138.48.

Influencing Factors to Consider

Home Depot's core focus is on what it calls "product authority," or delivering a wide selection of innovative products that keep do-it-yourself fans and professional customers alike returning to its locations.

Home Depot's profitability has soared over the past few years, with operating income jumping to 14% of sales in 2016 from roughly 5% during the worst of the housing crisis. That's an unusually high number, not only among retailers, but also in the home-improvement industry. Lowe's comparable figure is less than 9%.

Home Depot is targeting 15% operating margin by 2018. Home Depot has met the e-commerce online business challenge better than most retailers lately. Its e-commerce segment has risen to 6% of sales, compared to 4% for peers like Costco and Target. The company hasn't yet had to sacrifice profitability in exchange for building one of the biggest online sales presences, and management hopes it can keep that momentum going even as the retailing industry shifts toward e-commerce shopping.

Home Depot last year identified several economic metrics that point to strong gains ahead for home improvement, including home price appreciation, an aging housing stock, and the prospect of surging household formation numbers following almost a decade of below-average growth.

Their latest long-run forecast calls for these trends to help push sales past $100 billion by next year. Also in 2018, Home Depot plans to reach a 15% operating margin and a return on invested capital of at least 35%.

Home Depot is one of the most efficient businesses on the market, boasting returns on invested capital of 31% last year, up from 28% in the prior year. That's good enough to put the retailer in second place among the 30 members of the Dow ranked by ROIC.

While its store base isn't likely to grow much over the next few years, Home Depot has big plans to extend its reach into new segments for revenue gains. The two biggest of these are professional contractors and maintenance and repair operations.

These niches add $170 billion to Home Depot's market potential, which, in addition to the consumer segment it already dominates, gives it a total addressable market of $550 billion.

Analysts are expecting the revenue growth to be driven by SSSG (same-store sales growth), and the addition of new stores in the past 12 months. The company operated three more stores at the end of 4Q16. These stores, along with new openings in 1Q17, are expected to drive Home Depot’s 1Q17 revenue.

Home Depot has also completed its rollout of BODFS (buy online, deliver from store) in 1Q17, which was built on Home Depot’s new COM (customer order management) system. COM was implemented in 2Q16 in all of HD’s US stores. The revamping of HD’s website with better searches and faster checkout features, its upgraded mobile app, and the introduction of a dynamic estimated time of arrival feature are also expected to drive Home Depot’s online sales and revenue in 1Q17.

Meanwhile, the rolling out of Interline’s catalog of products in Home Depot stores in the US is also expected to boost the company’s 1Q17 revenue.

Analysts and Hedge Funds Opinions

Home Depot had its price objective raised by equities researchers at BTIG Research from $155.00 to $175.00 in a research note issued on Friday. The firm currently has a “buy” rating on the home improvement retailer’s stock. BTIG Research’s price objective points to a potential upside of 11.54% from the company’s current price.

Of the 19 analysts who cover the stock, 10 rate it a “strong buy”, two rate it a “buy”, and seven rate it a “hold”. The stock receives S&P Capital IQ’s 4 STARS “Buy” ranking.

Also, Kistler Tiffany Companies LLC increased its stake in Home Depot by 18.5% in the first quarter. Kistler Tiffany Companies LLC now owns 686 shares of the home improvement retailer’s stock worth $101,000 after buying an additional 107 shares in the last quarter.

Harvey’s Options Volatility Indicator


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

** OPTION TRADE: Buy the HD JULY 21 2017 160.000 CALL at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.

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