Home Depot Shares Breakout Ahead Of Second Quarter Earnings

Shares of The Home Depot, Inc. (NYSE: HD) broke-out of a six-month long price consolidation on Thursday accompanied by trading volume 33 percent above average. Home Depot shares closed at $119.75 Friday, marking an all-time closing record high.

Home Depot reported its year-end financial results in late February, beating expectations by 12.4 percent. Price levels defined by Home Depot equity traders in that session set the basis for a ceiling that was not convincingly breached until this past Thursday’s session – three trading days ahead of the release of second quarter Home Depot financial results.

Shares of Home Depot breakout before earnings.

Home Depot is set to announce second quarter results before the market opens on Tuesday. A conference call is scheduled by Home Depot management for 9 a.m. E.T.

The consensus among the 27 firms that publish earnings per share estimates for Home Depot is $1.71, representing year-over-year growth of 12.5 percent from the second quarter of 2014 when Home Depot reported per share earnings of $1.52. Sales of $24.71 billion are forecast, rising 4.7 percent over 2014 levels.

Home Depot’s EPS and sales growth are somewhat meager when compared with the growth numbers being reported at Facebook, Inc. (NASDAQ: FB) and, soon to be Alphabet Inc. subsidiary, Google Inc. (NASDAQ: GOOG). However, for a company with a market capitalization of $155.55 billion that employs 371,000 people, 12.5 percent earnings growth is quite respectable.

Home Depot carries $16.87 billion in debt, giving it a plus-sized debt to equity ratio of 183.3 percent. Return on equity for Home Depot is an ultra-strong 61.3 percent, demonstrating that though highly leveraged, Home Depot management have effective deployed the capital acquired with its debt financing activities. This is particularly impressive given that Home Depot reports relatively thin profit and operating margins of 7.8 percent and 12.7 percent, respectively.

Home Depot EPS estimates have seen only moderate increases over the past 90 days and estimates are for growth of 17.1 percent, 15.1 percent, and 14.7 percent over the coming quarter, coming full year and next year, respectively. The move to new high ground on Thursday may be telling of actual weakness in demand for Home Depot shares.

Often, when shares of companies with EPS growth of 20 and 30 percent and higher reach new price highs, volume increases significantly as traders recognize that shares are about to be taken to the next level. A lack of significantly increased trading volume when shares like Home Depot’s hit new high ground can signify indecision – many advise against taking new positions in stocks shortly before earnings announcements. Savvy institutional investors are not above artificially breaking a stock like Home Depot out to create enough of a market to dump a position on. Weak-volume breakouts shortly before earnings announcements are often viewed with skepticism.

Shares of Home Depot are up 43.2 percent over the past year and 325.1 percent over the past five years. Home Depot pays a total annual dividend of $2.36 giving Home Depot stock a yield of 2 percent.

[Photo by Scott Olson/Getty Images]