The Ratings Game: Home Depot shares sink after sales miss but there’s reason to be optimistic

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Home Depot Inc. shares sank 5% in Tuesday trading after the home improvement giant announced sales that missed expectations, but Raymond James analysts say there’s reason to be optimistic.

Home Depot HD, -4.74%   reported net income of $2.77 billion, or $2.53 per share, down from $2.87 billion, or $2.51 per share, last year. The FactSet consensus was for $2.52.

Sales for the quarter totaled $27.22 billion, up from $26.30 billion but below the $27.53 billion FactSet outlook. Same-store sales grew 3.6%, below the 4.7% FactSet guidance.

The results put Home Depot stock price on track for the biggest one-day post-earnings decline in more than a decade.

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Home Depot’s chief executive blamed the shortfall on the timing of benefits from company investments.

“We are largely on track with these investments and have seen positive results, but some of the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions,” he said in a statement.

As a result the company updated its full-year guidance, and now expects sales growth of 1.8% with a 3.5% same-store sales increase versus previous guidance for 2.3% sales growth and a 4% same-store sales increase.

Still, analysts are bullish. Raymond James says mortgage rates are now about 100 basis points lower year-over-year and existing home sales are positive, which will work in Home Depot’s favor.

“With the company prudently reducing Q4 2019 expectations and assuming no improvement in the two-year stacked comp (despite an improving macro), we view Q4 as largely derisked,” analysts led by Matthew McClintock said. “We believe Home Depot should be bought on weakness.”

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Raymond James rates Home Depot stock outperform.

Even with the better macroeconomic environment, GlobalData Retail says Home Depot has to contend with a resurgent Lowe’s Cos. LOW, -1.19%  

“Admittedly there has not been a major erosion in Home Depot’s market share, however, the visibility of Lowe’s has been improving and we believe that growth in the market is now being more evenly shared between the two main players,” Neil Saunders, GlobalData managing director wrote in a note.

“This trend is likely to continue for the foreseeable future and Home Depot will now need to contend with a more determined and aggressive rival.”

Lowe’s stock is being dragged lower by Home Depot, down 1.1% in Tuesday trading, but up 24.5% over the last year.

Lowe’s is scheduled to report third-quarter earnings on Wednesday during premarket.

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Home Depot will be able to hold on to its market dominance with help from those aforementioned investments. Saunders thinks the spend, which is going towards store improvements and the shift to a more multichannel shopping experience, will pay off.

But while Home Depot is willing to spend, consumers are a little less so.

“The number of people undertaking various big do-it-yourself activities is not growing as fast as it was this time last year, and this is likely one of the reasons why sales numbers are more modest than forecast,” Saunders said.

“The worry is that this trend will sharpen into 2020 as consumer finances come under more pressure – something that could weigh down on Home Depot’s prospects.”

Home Depot shares have gained 30.7% for the last 12 months while the Dow Jones Industrial Average DJIA, -0.43%   is up nearly 12% for the period.

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