Home Depot Earnings Preview: Third Quarter 2008

Home Depot (HD: 44.995 -1.02%) is scheduled to report third quarter 2008 results before the market opens on Tuesday, November 18. Based on our analysis, we at eChristianInvesting are expecting HD to report disappointing results that fail to meet Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $17.5 billion and EPS of $.37. This would represent a 8% decline in revenues from last year’s $19.0 billion in the same period. The current analyst consensus calls for revenues of $17.8 billion and $.39 EPS. On August 19, the company provided full year 2008 guidance for declines in revenues of approximately 5% and declines in EPS of approximately 24%.

Last quarter, Home Depot delivered surprising results to the upside – handily beating Wall Street analyst estimates. Much has changed in the economic environment in the past few months and we see very little chance for the company to deliver similar results this quarter.

·        There has been no substantial improvement in the housing market and our checks so further weakness in home improvement spending.

·        The number of customer transactions continues to decline as softening consumer demand led to declines in store traffic.

·        The average value of customer transactions has declined due to greater discounting and more value-conscious shopping.

Share Performance

To date, Home Depot’s shares have fallen 24%. By comparison, the Dow Jones industrial average has fallen 38% this year, and the Standard & Poor’s 500-stock index is down 42%.

Valuation

Shares are now trading at 13x consensus 2009 EPS estimates. This is premium with the relative valuations of their peer group. In the short term, macroeconomic pressures will continue to weigh on the company’s performance. There are little prospects of recovery for the housing markets in 2009 and a rising unemployment rate will further impact store traffic.

Recommendation: Sell with a $15 price target.