The Home Depot, Inc. (HD) and Best Buy Co., Inc. (BBY) – These Retailers Crushed Earnings Estimates. Are They Still a Buy?

Best Buy storefront. Source: Wikimedia Commons.

If investors were looking toward retailer earnings last week for improved consumer spending, they were likely disappointed. Macy’s second-quarter results came in below estimates on earnings per share and revenue. Wal-Mart was a similar story, missing estimates on EPS as well as revenue. To make things worse, both companies then lowered earnings guidance for the remainder of the year. While those two faltered last week, today brought us two retailers that beat estimates: The Home Depot, Inc. (NYSE:HD) and Best Buy Co., Inc. (NYSE:BBY). With their respective stock prices up 31% and 71% over the last 12 months, do they remain a buy today?

First up
First we’ll take a look at The Home Depot, Inc. (NYSE:HD), which delivered outstanding quarterly earnings. The company reported a 17.2% increase in net earnings to $1.24 per share, which easily beat estimates. The Home Depot, Inc. (NYSE:HD)’s comparable-store sales in the U.S. surged 11.4%, helping overall comp sales to 10.7%. The success wasn’t limited to the top line; operating margins improved by 90 basis points to 13.4%. To top it all off, management even raised guidance for the rest of the year.

Looking ahead, there’s one catalyst beyond a housing rebound that should keep The Home Depot, Inc. (NYSE:HD)’s share price rising. Consider that most do-it-yourself home improvement projects take place once a house surpasses 25 years in age, and that 70% of the housing market has now aged beyond a quarter-century. That should open up the doors for more revenue to flow through Home Depot stores and find its way to the bottom line.

From an investing standpoint, one thing you want to see in a company is its ability to produce sustainable profits. Even during the massive housing collapse, Home Depot used its low-cost advantage to generate return on invested capital, or ROIC, of 14% over the last five years — pretty impressive.

That success often requires returning value to investors, and The Home Depot, Inc. (NYSE:HD) doesn’t disappoint in this aspect. It has consistently improved its dividend and only rested temporarily during the housing collapse.

Graph by author. Information source: Nasdaq.com.

There’s a lot to like about The Home Depot, Inc. (NYSE:HD)’s stock, but the rebound of the housing market seems priced into it right now. Home Depot will remain on my watchlist, and in the event of a market pullback, it will definitely be a stock to consider.