Dow component Home Depot Inc. (HD) is trading higher by less than 1% after beating Q4 2021 top and bottom line estimates. The home improvement giant posted a profit of $3.21 per-share, topping expectations by $0.03, while revenue rose 19.7% year-over-year to $35.72 billion, more than $800 million higher than consensus. Reaction to the results and a dividend increase were muted after fiscal 2022 guidance showed little change over 2021.
Growth Reverting to 2019 Levels
The company is lapping historic growth booked during the early stages of the pandemic, making quarterly metrics less attractive to new investors. However, the drop off in demand has been less than expected so far, with continued growth fueled by a strong US economy and near record sales of new and existing homes. Even so, the stock has grown expensive at a lofty 23.19 price-to-earnings (P/R) ratio, much higher than rival Lowes Corp.’s (LOW) 19.42 P/E.
Gross margins are also falling due to rising inflation, dropping from 22.0% one year ago to 9.7% in the third quarter. Home Depot didn’t discuss margin in the pre-market release but should clarify during the 9:00am conference call. Lumber prices, in particular, will impact profitability going forward, with the relentless rise since August adding to Q4 results. On the flip side, margin-killing transportation costs and supply chain issues are likely to persist into 2023.
Wall Street and Technical Outlook
Wall Street consensus stands at an ‘Overweight’ rating based upon 19 ‘Buy’, 5 ‘Overweight’, 9 ‘Hold’, 0 ‘Underweight’, and 1 ’Sell’ recommendation. Price targets currently range from a low of $310 to a Street-high $470 while the stock is set to open Tuesday’s session less than $40 above the low target. This humble placement makes sense in the wake of superior 2020 and 2021 returns that have generated long-term overbought technical conditions.
Home Depot broke out above the February 2020 peak at 247.36 in May, entering an uptrend that stalled at 293 in August. The stock cleared that barrier in March 2021, gaining ground in two buying waves that ended at 420.61 in December. The subsequent decline completed a double top breakdown in January, signaling a correction that reached 200-day moving average support on Jan. 20. It’s been testing that level for the last month, with the post-news uptick too weak to declare victory for the bulls.
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Disclosure: the author held no positions in aforementioned securities at the time of publication.
This article was originally posted on FX Empire
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