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Home Depot Hits New High

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Shares of The Home Depot Inc. (HD - Analyst Report) reached a new 52-week high of $64.83 on Friday, November 23, 2012, beating its previous 52-week high of $64.44. The closing price of the world’s largest home improvement retailer as on November 23, 2012, was $64.82, which represented a solid year-to-date return of 56.5%. Average volume of shares traded over the last 3 months stands at approximately 8.330 million.

Growth Drivers

An impressive record of beating the quarterly earnings expectations, margin improvement, a positive fiscal 2012 outlook, and a decent dividend yield, are the major growth drivers for the shares of Home Depot.

With respect to earnings surprise, the company has topped the Zacks Consensus Estimates in the last four quarters, with an average of 9.6%.

On November 13, the company reported the third quarter 2012 adjusted earnings of 74 cents per share, surging 23.3% from the year-ago quarter earnings of 60 cents, primarily due to an improvement in sales and strong operating performance. Moreover, the company’s quarterly earnings modestly exceeded the Zacks Consensus Estimate of 70 cents a share.

Net sales increased 4.6% to $18.130 billion compared with $17.326 billion in the year-ago quarter, primarily due to increased number of customer transactions and average ticket size. During the quarter, gross profit increased 5.1% to $6.267 billion from $5.961 billion reported in the third quarter of 2011. Consequently, gross profit margin expanded by 17 basis points (bps) to 34.57%.

Operating profit jumped 7.3% to $1.733 billion from $1.615 billion reported in the year-ago period. Operating margin expanded 24 bps to 9.56% compared with 9.32% in the comparable quarter last year. The improvement in operating margin was primarily driven by elevated gross profit margin and effective cost management.

Following solid third-quarter results, management raised its fiscal 2012 adjusted earnings guidance to $3.03 per share, a 23% rise from the year-ago quarter earnings of $2.47 and up from $2.95 forecasted earlier. Moreover, the company expects net sales to grow by 5.2% in fiscal 2012, up from the previously projected growth of 4.6%.

Home Depot rewards its shareholders through regular quarterly dividends and share repurchases. Recently, the company announced its third-quarter 2012 dividend of 29 cents per share, payable on December 13, to the shareholders of record as on November 29. This yields a solid 1.9%, while the company has a payout ratio of 110%.

In the first nine months of fiscal 2012, Home Depot bought back nearly $1.312 billion worth of its common stock and intends to spend an additional $700 million towards share repurchase in the fourth quarter of fiscal 2012.

Valuation

Home Depot currently trades at a forward P/E of 21.43x, in line with the peer group average. Again, its price-to-book ratio of 5.51 is at a premium to the peer group average of 4.17.

Moreover, the company’s return-on-equity (ROE) and return-on-asset (ROA) are 24.8% and 10.5%, respectively, which are significantly higher than the peer group average. Given the company’s compelling fundamentals and earnings surprise history in the last four quarters, we believe that its EPS growth will be higher than the long-term expected growth of 15.2%.

Zacks Rank & Recommendation

We believe that Home Depot’s strategy of making its stores simpler and customer-friendly through the implementation of significant changes to its store operations has induced more customer traffic.

Moreover, with the introduction of a new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. This has also helped Home Depot improve its Central Automated Replenishment System to facilitate immediate refilling of stock while reducing investments in inventory.

Furthermore, we believe that the company’s sales will boost in near term due to damages caused by superstorm Sandy during October end, as rebuilding and clean-up activities will accelerate in the fourth quarter.

Home Depot will remain focused on optimum capital allocation, which will further enable it to increase shareholders’ wealth. However, given the current economic environment, we expect the spending on big remodeling projects to be under pressure once the storm clearance activities get over. This influenced us to keep our long-term recommendation on the stock at Neutral.

Home Depot currently maintains a Zacks #2 Rank, which translates into a short-term Buy rating. The company competes head-to-head with Lowe's Companies Inc. (LOW - Analyst Report), which holds a Zacks #3 Rank (short-term Hold rating).

About the Company

Based on net sales, Home Depot Inc. is the world’s largest home improvement specialty retailer with over 2,250 retail stores across the globe, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. With the help of its stores, the company operates throughout in the United States (including the territories of Puerto Rico and the Virgin Islands), Canada, China and Mexico and employs more than 300,000 associates.

Home Depot’s average store area is almost 104,000 square feet with approximately 24,000 square feet of additional outside garden area. The company typically serves three primary customer groups – Do-It-Yourself (D-I-Y), Do-It-For-Me (D-I-F-M) and Professional Customers.

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