Home Depot to break yearly high on strong FY16 outlook
The share price of the world’s largest home improvement retailer, Home Depot, Inc. (HD), is on the verge of breaking the12-month high of $137.82 per share. One of the main reasons for the bullishness is the fiscal 2016 first-quarter revenue and earnings that beat the analysts’ estimates. However, as explained below, there were several other important factors which contributed to a firm rise in the share price. The shares of Home Depot closed at $133.94 on Monday.
For the fiscal 2016 first-quarter, the Atlanta based company reported net sales of $22.762 billion, up 9% from $20.891 billion in the corresponding period last year. The revenue estimate of analysts was $22.39 billion for the first-quarter.
On a y-o- y basis, Home Depot recorded a 14.2% increase in the net earnings for the first-quarter. The net earnings came in at $1.803 billion, compared to $1.579 billion in the prior year similar period. Correspondingly, the earnings per share increased to $1.44, up 19% from $1.21 per share in first-quarter of fiscal 2015. The earnings estimate of analysts was $1.36 per share. The comparable store sales for the quarter grew 6.4%. In particular, the comparable store sales in the US increased 7.4%.
For the fiscal 2016, on a y-o- y basis, the company anticipates a 6.3% increase in the sales. Home Depot also expects a 4.9% growth in the comparable store sales.
The company also presented raised earnings guidance for the fiscal 2016. Home Depot now expects the fiscal 2016 earnings to rise 14.8% to $6.27 per share, on a y-o- y basis. The earnings outlook is higher than the analysts’ estimates of $6.23 per share.
The cash and cash equivalents of the company at the end of first-quarter ended April was $3.257 billion. This compares to $2.827 billion in the last year’s corresponding quarter.
The company declared a quarterly cash dividend of $0.69 per share, payable on June 16, 2016. This is the 117 th consecutive quarter of dividend payments. Considering the positive outlook and the growth in the comparable store sales, we can confidently expect an increase in the share price in the second-quarter.
Technically, the stock has a major support at 132. The last and the final known resistance exist at 136. A break above 136 will take the share price to uncharted territory. The stochastic indicator is rising upwards from the oversold territory. Thus, in the weeks to come, we can expect the stock to record new highs.
A one touch call option contract will fit the scenario very well. Furthermore, a strike price of $140 or lower and an expiry date in the last week of June would be a perfect combination to succeed in the trade.
