Through TheFLY's Eyes: Home Depot, Inc.
from Theflyonthewall.com













Adequate Earnings, But Not Adequate Enough

Home Depot (HD) executives Tuesday said they were “disappointed” with Q1 retail sales, and from its initial response Tuesday, so was the market.

In early afternoon trading Tuesday, shares of Home Depot plunged more than 3.5% or $1.42 to $39.06 after the company reported its Q1 totals.

Home Depot reported Q1 EPS of 70c, compared to 57c a year ago, and the 67c consensus estimate. The company said Q1 revenue totaled $21.5B, up 13.1% from Q1 2005, and slightly ahead of the consensus estimate of $21.4B.

Why the sell-off, despite a Q1 earnings stat that exceeded the consensus estimate? Tuesday’s market response was a classic example of Wall Street taking the “good numbers, but not good enough” stance. Home Depot’s Q1 revenue and profit results were adequate, but they were not good enough to allay investors’ concerns about the home improvement / hardware sector, in general.

Wall Street believes that with the economic expansion in its fifth year, the housing and home improvement sectors will slow, which would be consistent with sector slowdowns in previous economic cycles. In addition, rising energy/gasoline prices threaten to reduce consumers’ disposable income, putting another damper on Home Depot’s potential sales in the quarters ahead. Hence, while Home Depot posted adequate results, the totals were not enough to cancel out the downside factors of an expected housing sector slowdown and rising energy/gasoline prices. It’s a double whammy that argues against risk taking.

And currently, Wall Street is in no mood to take inordinate risks.