These Retailers Crushed Earnings Estimates. Are They Still a Buy?
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: Home Depot and Best Buy . With their respective stock prices up 31% and 71% over the last 12 months, do they remain a buy today?
First we'll take a look at Home Depot, which delivered outstanding quarterly earnings. The company reported a 17.2% increase in net earnings to $1.24 per share, which easily beat estimates. Home Depot'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 Home Depot'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 Home Depot doesn't disappoint in this aspect. It has consistently improved its dividend and only rested temporarily during the housing collapse.
There's a lot to like about Home Depot'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.
There are a ton of investors buying into Best Buy's turnaround, but I'm not as convinced. I'm especially not convinced after the stock has surged nearly 170% year to date. That said, today it recorded its first profitable quarter in a year and did so by crushing estimates. Excluding items, Best Buy's EPS came in at $0.32, which was far ahead of last year's $0.04 result and analyst estimates of $0.12.
Best Buy's revenue of $9.3 billion managed to beat estimates, but was a slight decline from last year's revenue numbers. The better-than-expected profit was largely from its cost-cutting measures, which is fine but can only take the company so far. Best Buy needs to find a way to grow revenues, which it has struggled to do as Amazon continues to thrive online. One way to grow said revenues would be to defend its turf against Amazon and grow its online presence. Best Buy managed to accomplish that during its last quarter and increased its online sales by 10.5%. That was unfortunately partially mitigated by its comparable in-store sales dropping 0.6%.
There are a lot of people who believe Best Buy will return to full health, but I remain very skeptical. I think Amazon will keep a lid on Best Buy's revenues going forward, and that could put a ceiling on Best Buy's future growth. The stock seems ahead of its turnaround, and with its stock price soaring around 170% year to date, it already trades at a P/E ratio of 15 compared to retail juggernaut Wal-Mart at 14 -- based on this year's earnings. I missed Best Buy's recent run-up and I won't be jumping on the bandwagon anytime soon, because there are better investment opportunities in the market.
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The article These Retailers Crushed Earnings Estimates. Are They Still a Buy? originally appeared on Fool.com.Fool contributor Daniel Miller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Home Depot. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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