Improving Home-Improvement Retailer Sentiment Is Big Positive for Home Depot Inc (HD)

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The housing sector as a whole has come a long way after the housing bubble in 2008. That is truly demonstrated in the third quarter housing data. Housing starts averaged 1.16 million units in the September quarter, representing 13.1% year-over-year growth. Similarly, the National Association of Home Builders said that the housing recovery has gained traction. The most significant point of its assertion was that the homebuilder sentiment has reached a decade high probably for the first time in the three-month period July to September. That is an advantage for Home Depot Inc (NYSE:HD) that is witnessing a tremendous growth in stock prices after the 2008 housing fiasco that dragged its stock to less than $25 in November that year. The current market price suggested how the company has recovered from the shocking scenario. The third quarter numbers also threw some favorable factors that will keep the sentiments positive in the company, as well as the industry.

Sector Is Performing Very Well

Home Depot Inc (NYSE:HD) is a leader in the home improvement retail segment. The company was not the only one to deliver a better than expected top line, as well as bottom line for the third quarter. Its rival, Lowe’s Companies, Inc. (NYSE:LOW), also delivered better than the predicted earnings number for the three-month period ended October. In fact, the company reversed the preceding two quarters trend to post positive earnings surprise in the latest quarter. That indicated the improved sentiments in the overall market benefiting everyone concerned. Another company on the housing sector’s retail side, American Woodmark Corporation (NASDAQ:AMWD) was also the beneficiary of the improving sentiments.

Lennar Corporation (NYSE:LEN) is one more company in the industry that delivered significantly higher than expected earnings for the third quarter. As a leader, Home Depot Inc (NYSE:HD) is set to take advantage of the market conditions with positive sentiments. The primary reasons for the industry to do well was that people have started spending more on home improvements as the housing market staged a strong recovery in the United States. One of the favorable factors was that the significant drop in gasoline prices enabled consumers to open up their purses. Also, they have reduced their spending on discretionary items like apparel between August and October.

Increased Pricing Of Houses

During the earnings conference call, Home Depot Inc (NYSE:HD) CEO, Craig Menear, said that the average GDP projections in the United States have moderated in the current year. However, he said that the company continued to witness favorable signs in the house data. More than that, he saw price appreciation, as well as housing turnover that turned out to be the key drivers of growth in its business. Another significant aspect of its third quarter results was that every department of the company, be it appliances or plumbing or tools, has recorded comparable store sales growth in the third quarter. It was a broad-based growth in its geographies, as well as categories fueled by transactions growth in its Pro and DIY customers.

Those favorable factors drove Home Depot Inc (NYSE:HD)’s comparable store sales in the United States to 7.3% growth, which was significantly higher than the expectations of 5.9%. The overall comparable store sales growth was 5.1%. The company also said that demand came from both professional contractors, as well as builders, apart from retail customers. The company’s CEO, Menear, said that the single transaction size witnessed close to 8% growth to more than $900 in the third quarter. As a result, the company is now projecting a healthy 4.9% same store sales for the fourth quarter.

Outlook Is Favorable

There are some positive factors that Home Depot Inc (NYSE:HD) can look forward to taking advantage of in the improving housing market sentiments. For instance, the housing market index of the National Association of Home Builders and Wells Fargo & Co (NYSE:WFC) reached its highest level in October after the year 2005. Also, there is a limited inventory of new, as well as the existing homes boosting the prices. Wells Fargo said that the housing starts to average approximately 1.22 million units in the fourth quarter. The brokerage also sees the housing start edging up further in the next year. That ensures there is enough growth for the home improvement retailer firm next year also.

Home Depot Inc (NYSE:HD) has boosted its fiscal year 2015 adjusted earnings outlook to $5.36 a share. In the previous quarter, the company provided its earnings expectations between $5.31 and $5.36 a share. The company is also planning to spend $2 billion towards share repurchase in the fourth quarter. That would take the total share repurchase to $7 billion in the current fiscal year. Raymond James believes that the company did well to execute a high level planning that ensured year-over-year growth on a tough retail environment, as well as sluggish GDP growth. In any case, the brokerage said that its valuation allowed them to assign a constructing rating of Market Perform only. However, the brokerage boosted its EPS estimation to $5.33 from $5.28 for the current year and to $6.10 from $6.05 for the next year.

PE Multiples

Currently, Home Depot Inc (NYSE:HD) enjoys PE multiples of over 24 times the current year’s EPS projections and 21.4 times the next year’s projected EPS. That means it is already commanding a premium compared to its rival Lowe’s Companies, Inc. (NYSE:LOW). That is one of the reasons Raymond James rated it as Market Perform stock.

Conclusion

Currently, shares of the company appeared to be fairly priced. However, any dip in the share prices of Home Depot Inc (NYSE:HD) can be considered as worth buying. The industry is witnessing a favorable sentiment and the stock too is favorably poised. The stock will set to perform as provided by the market direction.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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