An options trade to generate some income on Home Depot with earnings ahead

CNBC

3 days ago

Home Depot (HD) , a leading home improvement retailer, is scheduled to announce its fiscal second-quarter 2025 earnings next Tuesday before the market opens. Analysts forecast earnings per share (EPS) of $4.71 on revenues of $45.43 billion, representing year-over-year increases of 2.33% in EPS and 5.21% in sales. This follows a challenging Q1, where comparable sales saw a slight decline of 0.3% due to cautious consumer spending. As of Friday, the stock has a year-to-date total return (net of dividends) of just 1%, trailing the S & P 500 by about 8.5%. The housing market has remained under considerable stress, largely influenced by higher interest rates than the immediate post-GFC period, high median home prices/shortages, and, more recently, signs of financial strain on consumers. Key areas to monitor in the earnings report include comparable sales trends, the performance of the professional (Pro) segment, an area of historical strength relative to competitor Lowe's, and management's guidance, especially in light of potential Federal Reserve interest rate adjustments. The Pro segment (serving contractors), accounts for roughly 50% of revenue and has typically provided stability, as professionals consistently rely on Home Depot for essential supplies and services. This segment's customer loyalty helps mitigate consumer spending volatility. Bulls anticipate that Q2 results will show accelerated demand within this segment, potentially surpassing consensus estimates if spring and summer project activity rebounds. Anticipated interest rate reductions are expected by some to rejuvenate the housing market; however, I would caution against too much optimism for housing on the basis of cutting short-term rates by the Fed, as mortgage rates are typically driven off the longer end of the curve. While affordability remains a concern, there have been signs that home prices have leveled off and, in some markets, are actually seeing declines. The issue of mortgage rates is not only affecting affordability for new buyers, but existing homeowners who have mortgage rates considerably lower than today's prevailing rates may feel "locked in" to their existing homes, as they could not replace their current mortgages at anything close to the rate they currently carry. From a valuation perspective, Home Depot trades at 25 times forward earnings, in line with the 5-year average; however, it should be mentioned that the housing market was far more favorable for several years during that period and the company does trade at a premium to comps of anywhere from 6% to 27%, depending on the metric. Competition from rivals like Lowe's and online retailers such as Amazon is intensifying, potentially eroding market share in more commoditized product categories. Home Depot has not typically moved sharply following its quarterly earnings releases, and alternative data, such as Bloomberg Second Measure and Similarweb see Home Depot's YoY revenue growth as better than the industry overall, even the most optimistic assessment is relatively modest, and the most pessimistic, Placer.ai , actually sees YoY growth at negative 2.5% and relative industry underperformance of 180bps. One additional consideration, due to the various delays in implementing tariffs, the effects have yet to be fully felt. The trade If one believes that Home Depot's earnings are likely to be a bit of a "non-event", as they generally have been in the past, one may want to sell some premium. I do not generally favor selling "naked upside" (uncovered calls), so for the upside, selling call credit spreads is a good approach. To the downside, selling cash-covered puts offers the opportunity to collect some premium with the risk of owning the stock at a discount to the prevailing stock price. Of course, one could also combine the two strategies, as I do in the example below. DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.