Home Depot Falls After Earnings Announcement

Home Depot (HD, $26.20, down $0.76) reported a 24% drop in profits and reiterated its downbeat outlook for the rest of the year. The weak housing market that shows no signs of recovery continues to plague Home Depot but once again, in the scheme of things, their earnings report was not all that bad.

For the quarter, the company said earnings fell to $1.2 billion, or $0.71 a share. This was down from $1.59 billion, or $0.81 a share, during the same period last year. Given the backdrop for housing, I’d say Home Depot did all right. Revenue slipped a little over 5% to $21 billion, down from $22.2 billion last year. Although same-store sales fell nearly 8%, a 10% drop on certain levels doesn’t sound as bad as the 24% drop in profits.

The results easily beat Wall Street’s expectations of $0.61 a share on revenue of $20.6 billion. The better-than-expected results indicate a slight pick-up from an earlier slowdown by consumers who had postponed home improvement projects. Home Depot also projected full-year sales should decline by 5% which means the stock is not out of the woods. However, the bottom is near for Home Depot and if the stock falls back to the $20-$21 level, I’d be a buyer of some longer-term options.

The January 2010 25 calls (WHDAE, $5.00, down $0.70) don’t expire for another 18 months which gives the company five or six quarters to turn things around. The key for us is that we will want to be in the trade before Wall Street notices the turnaround. If these calls can get below $4.00 we will take another look at them.

Rick Rouse
Rick@OptionsMentoring.com

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