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Updated Research Report on Home Depot

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On Mar 31, 2014, we issued an updated research report on The Home Depot Inc. (HD - Free Report) following the company’s robust results for the fourth quarter of fiscal 2013, along with an impressive fiscal 2014 outlook and a raised quarterly dividend announcement.

Home Depot reported better-than-expected bottom-line results for the fourth quarter as earnings of 73 cents per share exceeded the year-ago quarter’s adjusted earnings of 67 cents as well as Zacks Consensus Estimate of 71 cents. The bottom-line beat was primarily driven by effective cost management and lower share counts.

Moreover, Home Depot provided impressive sales and earnings forecasts for fiscal 2014. The company projects sales and comps growth of approximately 4.8% and 4.6%, respectively. Further, the company projects gross margin to remain flat year over year while expecting operating margin to expand nearly 70 bps.

Its tax rate is anticipated to be about 37% and the company anticipates repurchasing shares worth $5 billion. Considering these factors, Home Depot expects earnings on a diluted basis for the fiscal to grow 16.5% to $4.38 per share.

Being the world’s largest home improvement retailer, we believe that Home Depot remains well positioned to benefit from the gradually recovering housing market and expect the company to continue with its upbeat performance going forward. The company boasts a history of beating the Zacks Consensus Estimate for 7 consecutive quarters. The trailing 7 quarters average surprise stands at 5.2%.

Home Depot has always maintained a disciplined capital allocation strategy, focused on making investments to develop its business, while using the excess cash to enhance shareholder returns via paying dividends and share buybacks.

Along with its earnings release, Home Depot approved a 21% hike in its quarterly dividend payout. The increased dividend of 47 cents per share, which is payable on Mar 27, marks the company’s 108th consecutive quarterly dividend payment.

Since 1987, the company has increased its dividend from 6 cents to 47 cents. Additionally, the company targets to increase its return on invested capital to 24% by the close of 2015.

Additionally, we expect Home Depot’s focus on developing merchandising tools and increasing investment in e-Commerce to boost its top line and increase market share. Moreover, we believe that the company remains on track to achieve its long-term dividend payout, share repurchase and return on investment targets.

However, we remain slightly cautious about the stock due to a sluggish economic recovery impacting discretionary spending and intense competition from Lowe’s Companies Inc. (LOW - Free Report) , The Sherwin-Williams Company (SHW - Free Report) , Lumber Liquidators Holdings Inc. (LL - Free Report) and other home supply retailers. Apart from this, the company remains exposed to risks of operating in overseas markets, primarily currency fluctuations.

The weakening of foreign currencies against the U.S. dollar may require the company to either raise product prices or contract profit margins in locations outside the U.S. An increase in product price may have an adverse impact on consumer demand.

Currently, Home Depot carries a Zacks Rank #3 (Hold).

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