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Home Depot Reiterated at Neutral

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The world's bellwether home improvement retailer, The Home Depot Inc. (HD - Free Report) , remains on our Neutral list with a target price of $84.

Why Reiterate?

Home Depot is a leading player in the highly-fragmented home improvement industry. The company has been revamping itself by concentrating on square footage growth and increasing productivity from its existing store base.

In addition, the company has implemented significant changes in its store operations to make the latter simpler and more customer-friendly. We expect these initiatives to induce more traffic to its stores and boost the top line.

Furthermore, Home Depot follows a disciplined capital allocation strategy, which focuses on making investments to develop its business, while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks.

In the past quarter, Home Depot posted stronger-than-expected third-quarter earnings, driven by a rebound in the housing market. Following a strong performance in the quarter, management raised its sales and earnings forecasts for fiscal 2013. This stimulated a positive movement in the Zacks Consensus Estimate, which has been showing an upward trend over the last 30 days.

With a positive surprise of 6.7% in the third quarter, Home Depot has beaten the Zacks Consensus Estimate for six consecutive quarters. The average surprise for the trailing six quarters stands at 5.4%. We expect Home Depot to continue the trend of posting positive earnings surprises in coming years, given the resurgence in the housing market and the company’s encouraging outlook.

On the other hand, Home Depot’s primary competitor, Lowe’s Companies Inc. (LOW - Free Report) first-quarter earnings were below expectations. The company posted earnings of 47 cents per share, which missed the Zacks Consensus Estimate by a penny.

However, we remain slightly cautious about Home Depot’s performance due to a sluggish economic recovery that could impact discretionary spending, along with intense competition from specialty stores and mass retailers. The company also remains vulnerable to risks arising from overseas operations, especially currency fluctuations.

Given the pros and cons of the stock, we prefer to remain on the sidelines and maintain our Neutral recommendation.

Other Stocks to Consider

Home Depot currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the home improvement retail industry include Builders FirstSource Inc. (BLDR - Free Report) and Lumber Liquidators Holdings Inc. (LL - Free Report) . While Builders FirstSource has a Zacks Rank #1 (Strong Buy), Lumber Liquidators holds a Zacks Rank #2 (Buy).

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