Is Home Depot Guidance Too Timid?

After a dismal week of missed earnings estimates from department stores, Tuesday morning saw home improvement giant Home Depot Inc. (NYSE: HD) blow past estimates and raise its guidance for the full fiscal year. While Home Depot’s results are outstanding compared with the recent bad news from the likes of Macy’s and Nordstrom, there is a very good chance that given the expected strength in the home remodeling market in 2016 and 2017, the company could be too timid in its forecast.

Home Depot reported diluted net earnings per share of $1.44 in the first quarter, up 19% compared with last year’s first quarter, and nearly 6% higher than the consensus estimate. Revenues of $22.8 billion were up 9% year over year and nearly 2% above the consensus estimate.

The company raised its sales guidance from a prior range calling for a year-over-year increase of 5.1% to 6.0% to a new total of 6.3%. Same-store sales, previously forecast to rise by 3.7% to 4.5%, are now forecast to rise 4.9%. Guidance for diluted earnings per share was boosted from a prior range of $6.12 to $6.18 to a new total of $6.27.

In April the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University released its most recent report on home improvement and repair spending. According to their benchmark study, home remodeling and repair spending will increase to about $310 billion (up 8.6%) in the fourth quarter of 2016 and rise to almost $324 billion (up 9.7%) in the first quarter of 2017. The estimate for the first quarter of this year called for spending of about $295 billion, up 4.7%.
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The Joint Center’s managing director, Chris Herbert, said:

Ongoing gains in home prices and sales are encouraging more homeowners to pursue larger-scale improvement projects this year compared to last with permitted projects climbing at a good pace. On the strength of these gains, the level of annual spending for remodeling and repairs is expected to reach nearly $325 billion nationally by early next year.

How are homeowners paying for all this? Even though mortgage loan rates are low, refinancing remains relatively muted. Partly that’s the result of increased refinancing before mortgage rates rose early last year and partly it’s due to stricter lending conditions.

A SunTrust Bank survey cited at Bankrate.com in early April found that nearly two-thirds of homeowners planning renovations plan to pay for the work with savings. This could mean that homeowners who once may have considered buying a more expensive house are now choosing instead to remodel or renovate their existing home.

That is good news for Home Depot and for Lowe’s Companies Inc. (NYSE: LOW), the other large home improvement chain and for lumber yards and hardware stores in general.

Home Depot’s stock traded up about 0.3% in Tuesday’s premarket to $135.75. The stock’s 52-week range is $92.17 to $137.82, and the consensus price target is $145.87. Shares rose 2.2% on Monday in anticipation of Tuesday’s results.

Lowe’s stock rose nearly 2.7% on Monday to close at $77.00, in a 52-week range of $62.62 to $78.13. The company reports first-quarter results Wednesday before markets open and is expected to post earnings per share of $0.85, a 21% year-over-year improvement, and revenues of $14.87 billion, a gain of 5.2% year over year.