HD Q1 Earnings Cheat Sheet

by Enis May 19, 2014 1:07 pm • Commentary

Event:  HD reports its fiscal Q1 earnings tomorrow morning before the open.  The options market is implying about a 3% one day move, which is slightly above the 4 qtr avg of about 2.25% and in line with the 8 qtr avg of about 3%.

Sentiment:  Wall Street analysts are somewhat positive on the stock, with 19 buys, 11 holds, and only 1 sell, and an average 12 month price target of around $89.62.  Short interest is negligible at 0.8% of the float.  HD is flat over the last year, and down 7% so far in 2014.

Options Open Interest:  Total options open interest is slightly skewed towards puts, by a ratio of 1.05 to 1. In contrast, the 1 month average volume has been skewed to calls over puts by a ratio of 1.4 to 1.  The Jun13th 79 puts and the Jun21st 80 calls are the only two strikes with over 7k of open interest.

Price Action / Technicals:  HD traded above $80 for the first time in May 2013, after a very strong, steady uptrend from late 2011 which started under $30.  HD broke above the prior all-time high of $70 from 2000 in early 2013:

HD monthly chart, Courtesy of Bloomberg
HD monthly chart, Courtesy of Bloomberg

Since that breakout, the stock has mostly traded in a tight range between $72 and $82, except for a brief foray higher in March of this year:

HD daily chart, Courtesy of Bloomberg
HD daily chart, Courtesy of Bloomberg

Those are the two obvious levels to watch, with a whole lot of chop and no movement in between over the past year.

Volatility:  HD 30 day implied volatility is lower this quarter ahead of earnings compared to the past 2 years:

HD 30 day implied volatility, Courtesy of Bloomberg
HD 30 day implied volatility, Courtesy of Bloomberg

Given the continued rangebound price action and the low earnings moves over the past 4 quarters (2.5%), options seem fairly priced in HD.

Our View:    HD is a stock in which we became more vocal in the first half of 2013 that valuation had gotten ahead of itself.  Since then, the stock has essentially corrected through time rather than price, and is now a bit more reasonably priced (20x P/E for 15% expected earnings growth over the next few years).

Expectations for Q1 might be lower than usual given the weather situation, but investors are likely going to expect full year guidance that is in line with the company’s prior guides.  With a rangebound technical situation and stable fundamental backdrop, this is a stock that only makes sense to trade at either extreme of the range to us, not in the middle as it is now.