Home Depot Falls On Ratings Downgrade By Guggenheim

Home Depot Falls On Ratings Downgrade By Guggenheim
September 18, 2019


The shares of The Home Depot, Inc. (NYSE: HD) declined 0.34% or $0.78 to $230.21 yesterday after the big-box retailer was downgraded to “neutral” from “buy” by Guggenheim Securities, which sees an increase in spending and other expenditures affecting earnings in 2020.

Guggenheim downgraded the stock of Home Depot to neutral as the investment research firm anticipates the home improvement retailer’s capital expansion plans to negatively impact margins. Home Depot initiated its $5.40 billion investment plan in 2017, with continuing investment in stores, online and supply chain divisions. Even though the strategy is moving forward as planned, a portion of the spending plan has been postponed to 2020, increasing capital expenditures. That is anticipated to have a negative impact on margin.

As per Guggenheim, Home Depot’s huge investment plan is dragging on the margin. The analyst expects the investment costs in 2020 will have a negative impact of 20 to 40 basis points on EBIT margins. In addition, operating costs will have act as a headwind to EBIT margin in 2020.

Guggenheim analyst Steven Forbes doesn’t believe that there is a possibility of an increase in EBIT margin in 2020. Forbes said, “We find it difficult to see a path to EBIT margin expansion in 2020 as both a) investment spending and b) the associated D&A drag are poised to ramp.”

However, Forbes does not expect HD to report 2020 EBIT margin below the low-end of the company’s guidance range.  Forbes further warned “we do view current consensus expectations as aggressive given the potential impact.”

Based on the facts provided above, the company downgraded the company’s stock to ‘neutral’ and also withdrew the price target of $230. Guggenheim also slashed its 2020 earnings per share forecasts for Home Depot to the lower end of the consensus range.

It can be remembered that in the third week of August, the Atlanta-based enterprise warned that future earnings growth would be less robust primarily due to declining lumber rates and possible effect of import duties on customer behavior.

Home Depot reported Q2 2019 net income of $3.5 billion, or $3.17 a share, compared with $3.5 billion, or $3.05 a share, in the similar period last year. The company also reported Q2 revenues of $30.80 billion. The Wall Street analysts had anticipated earnings of $3.09 per share on revenues of $31.022 billion.

Same-store sales, an essential measure among brick-and-mortar vendors, increased 3%, versus analysts’ expectations of 3.4%. The company also stated that it anticipates FY19 sales to increase roughly 2.3%, and comparable-store sales to grow by 4%. HD also reconfirmed its EPS (earnings per share) growth outlook of $10.03 for FY19. Analysts surveyed by Thomson Reuters had anticipated FY19 revenues of $10.13 per share. The rating downgrade is expected to keep the stock weak in the short-term.

Technically, the stock is facing resistance at 230 levels. The RSI indicator is in the overbought region. As a result, we can expect the stock to undergo a price correction. The next major support for the stock exists at 200.

hd - technical analysis - 18th Sept 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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