Dow component The Home Depot, Inc. (HD) is trading lower by more than 2% in Tuesday's pre-market despite beating fourth quarter 2020 top- and bottom-line estimates by wide margins. The company booked a profit of $2.65 per share, $0.28 better than expectations, while revenue surged 25.1% year over year to $32.26 billion, beating consensus by more than $5 billion. Quarterly comparative sales growth of 24.5% tracked a booming housing market, underpinned by the exodus out of northeastern and west coast urban centers.
The home improvement giant guided fiscal year 2021 toward "flat to slightly positive comparative sales growth and operating margin of at least 14%." The board of directors also approved a quarterly dividend increase of 10% to $1.65 per share, or an annual dividend of $6.60. Macro market conditions may have intensified the sell-the-news reaction, with major benchmarks trading sharply lower ahead of Tuesday's opening bell.
The company has benefited from the COVID-19 pandemic in two ways. First, sales have surged as individuals and families idled by lockdowns and stay-at-home requirements have undertaken home improvement projects to keep from going stir-crazy. Second, the quantum leap from crowded offices to remote meetings has freed up many employees from local geography, encouraging them to leave poorly run cities and build or renovate homes in remote locations.
Wall Street consensus on Home Depot stock hasn't changed much in recent months, with an "Overweight" rating based upon 19 "Buy," 4 "Overweight," 8 "Hold," and 1 "Underweight" recommendation. Price targets currently range from a low of $245 to a Street-high $355, while the stock is set to open Tuesday's session just $20 above the low target. This poor placement reveals a conflict between analysts and investors about Home Depot's long-term outlook.
Operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company's operating income by its net sales. Higher ratios are generally better, meaning the company is efficient in its operations and is good at turning sales into profits.
Home Depot Weekly Chart (2013 – 2021)
The stock completed a round trip into the 2000 high at $69.75 in 2013 and broke out, easing immediately into a basing pattern on top of new support. Aggressive buying interest returned in 2014, generating a steady uptick that ran out of steam just above $200 in the first quarter of 2018. A September breakout attempt failed, yielding a major decline that found support at a 15-month low at the end of December.
A 2019 uptick reached resistance in July, generating an August breakout that topped out at $247.36 in February 2020. The pandemic decline then generated another failure swing, dumping the stock to the lowest low since February 2017. The subsequent bounce unfolded at the same trajectory as the prior downdraft, completing a 100% retracement into the first quarter peak in May. An immediate breakout paused for a month before embarking on a summer rally that posted an all-time high at $292.95 in August.
The stock has been range bound since that time, carving a shallow bull flag pattern with current support near $255. That level has narrowly aligned with the 50-week exponential moving average (EMA), marking a potential low-risk buying opportunity. However, both weekly and monthly stochastic oscillators are now engaged in active sell cycles, predicting weakness that could stretch well into the second quarter. As a result, the 2020 breakout in the $230s could offer a more realistic downside target.
A flag is a price pattern that, in a shorter time frame, moves counter to the prevailing price trend observed in a longer time frame on a price chart. The flag pattern is used to identify the possible continuation of a previous trend from a point at which price has drifted against that same trend. Should the trend resume, the price increase could be rapid, making the timing of a trade advantageous by noticing the flag pattern.
The Bottom Line
Home Depot is trading lower despite beating fourth quarter 2020 top- and bottom-line estimates by wide margins.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.