Investing in companies that are good at beating earnings has been a popular strategy for decades. After all, who wants to invest in companies that keep missing the mark? Sometimes this leads investors into a game of chasing performance and good news, which means sometimes they are overpaying or are getting in just because of one good quarter. At Home Group Inc. (NYSE: HOME) saw a 33% gain in its shares after earnings. Is this sustainable?
When At Home rose to $12.60 a share on Thursday, up from its pre-earnings stock price of $9.44, the gain came on more than 23.1 million shares trading hands on Thursday alone. The stock also traded as high as $13.54 and as low as $11.68, so it was close enough to the middle of the range for government work.
At Home is winning from the invest-in-home and stay-at-home themes in the COVID-19 recession. Millions of Americans are not very excited about leaving their home and getting exposed to the coronavirus, and those who do want to go shop somewhere are likely to feel safer in an At Home store due to its vast space and sprawling layouts. Rather than conducting business only online, it operated 219 superstores for home furnishings in 40 states as of June 2020.
At Home’s revenues for the second quarter of 2020 came to $515 million, after a 42% surge in same-store sales. The gains came from pent-up demand and from stimulus spending, but rather than losing money it expects net income to be at least $82 million and sees adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) coming in at $150 million or more. Lee Bird, At Home’s chief executive officer, said that the company is emerging from the pandemic stronger and even better positioned, and he noted that it is taking market share as well.
Bird even called At Home a home decor category killer with a one-stop-shop with vast selections and low prices, as well as having an omnichannel offering and allowing for safe social distancing due to the size of its massive stores. The 33% gain in the stock was boosted by the comment that this was the best quarter in its history as a public company for issues such as total sales, comparable store sales and profitability, and with the lowest leverage ratio.
One additional item noted was that At Home has sold three of its properties for roughly $33 million combined. Those are all good buzzwords that drive investor interest. And to create even more upside in the minds of investors, having a pre-earnings market cap of about $600 and a stock price that used to be almost $40 in mid-2018 allows some investors to wonder how much more room the stock has to run.
24/7 Wall St. tracks dozens of analyst calls each day to look for new ideas and rekindled old ideas that may look better than they have seemed. Two key analyst calls stood out in At Home. While one call was a Buy rating and one was a Hold rating, both came with handily higher target prices and both implied that At Home’s stock price had more room to rise.
Wells Fargo’s Zachary Fadem maintained a Hold rating on At Home, but the price target jumped to $14 from $6 in the call. That is against a $12.60 recent close, which still implies to baseline 10% or so upside that is needed to justify most other Buy or Outperform ratings.