Home Depot: Considerable upside exists

By Money Matters Editors

The Home Depot’s (HD) Q3 earnings report is an example of what ails Wall Street right now: an expectations game that’s slightly unrealistic.

Home Deport reported Q3 EPS of 41 cents per share Tuesday, well above the First Call EPS consensus of 36 cents, and what did Wall Street do? Of course it sold the stock, with shares closing down about 30 cents to $26.99.

Home Depot even offered decent Q4 earnings guidance of 13 cents per share, compared to the First Call EPS of 16 cents. True, same store sales are decelerating, but that’s no surprise, given the housing sector’s contraction and the ‘frugal consumer’ era. In any event, the company still expects FY2009 EPS of $1.55 – in-line with the First Call FY2009 EPS estimate of $1.55.

What’s more, while a large recovery in sales is not expected in Home Depot’s key markets of California, Florida, and Arizona, those three are showing signs of stabilization. The worst is over in those markets, from a home price standpoint.

Further, slap a 20 multiple on next year’s earnings estimate of $1.69 and HD should be trading near $34. Any better-than-expected U.S. GDP performance in the quarters ahead, Q1 2010 to Q4 2010, and Home Depot’s shares will race ahead.

Perhaps the stock’s sluggishness recently has to do with short-term institutional investors (IIs) taking their profits ahead of the end of the year: HD has risen more than 55% since hitting a low around $17.50 in March.
But look on any HD pull-back as a Buy opportunity. Money Matters Editors believe HD’s shares are headed to $40 in 2010.

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Disclosure: No Money Matters Editor or staff member owns a position in a stock they write about.