Inside Wall Street: Home Depot a big winner in Q1

Investors bet on a gradual recovery in the housing sector.

By Gene Marcial Apr 2, 2012 12:08PM
Image: Home under construction (© Corbis)With headlines about the economy's recovery turning more positive, investors have started to seriously scout for growth-but-less-risky stock plays in one of the most depressed sectors of the economy: housing.


While the turnaround is expected to be gradual, some companies associated with the industry have already started to shine.


One of them is the home-improvement giant Home Depot (HD), which operates  2,252 building supply stores in the U.S., China, Canada, and Mexico. Although a number of analysts on Wall Street remain negative on the stock, Home Depot has outperformed, ranking as one of the top five stock market winners in 2012's first quarter.


The stock is close to posting a new 52-week high as it ended at $50.31 a share on March 30, 2012, versus its current 52-week high of $50.42. That's way up from its 52-week low of $28.13 hit on Aug. 10, 2011.


"These shares are a good selection for a variety of investors," says Matthew E. Spencer, analyst at independent investment firm Value Line.


Some big institutional investors have been buying as they expect the housing industry's snap-back will push Home Depot's stock to as high as $65 a share in 12 to 18 months. And an additional fillip: Home Depot pays an enticing dividend, with an annual yield of 2.3%.


"Fiscal 2012 should be another good year for the company," forecasts Spencer, who says Home Depot's strong near-term earnings growth should appeal to momentum investors, as should the stock's "timeliness" ranking of 2 (above average) in Value Line's stock-ranking system.


Solid figures on building permits and housing starts in January and February indicate a better environment, notes the analyst. Over the near term, Spencer expects maintenance and repair projects will continue to drive results.


All told, he sees Home Depot earning about $2.80 a share in 2012 on sales of roughly $73.4 billion, and $3.15 in 2013 on estimated sales of $74.9 billion. In 2011, the company earned $2.47 a share on sales of $70.3 billion. Management plans to open 11 new stores this year, notes Spencer.


One of the company's largest shareholders is Capital World Investors, which owned a stake of 11.9% as of the end of 2011. Home Depot dwarfs its peers with its market capitalization of $76.3 billion. The market cap of its closest rival, Lowe's Cos. (LOW), is $36.4 billion. Other companies in its peer group are Kingfisher (KGHFY) in Europe, with a market cap of $11.5 billion, and Rona (RON) in Canada, with $1.1 billion. 

  

Home Depot sells a wide assortment of home improvement products, mainly for the do-it-yourself and home-remodeling markets. Fueling demand this year is the large number of foreclosed homes, many of which end up being purchased by real estate professional investors or bargain-hunting families. As the buyers take over the properties, they to rebuild and rehabilitate the foreclosed homes. That's all a big boon to Home Depot's sales.


"We expect the housing to recover gradually over the coming year and believe Home Depot will reap rewards from an accelerated focus on customer service," says one Wall Street analyst. Favorable demographic trends, he adds, such as the aging of houses and low-interest rates, should help support home-remodeling efforts over the long term. The analyst also notes that Home Depot's solid balance sheet and the company's ability to generate strong free cash flow are big positives during the housing industry's recovery.


Another housing industry watcher sees Home Depot's operating margins continuing to widen, aided by improving pricing environment in the housing market, and gains from the company's investments in new deployment centers.


Same-store sales are expected to be in a continued uptrend, which should help the company effectively maintain tight expense controls.


So for a housing play, Home Depot has all fundamentals that should please aggressive as well as conservative investors, with its growth strategy and dividend -- plus a niche in the ever-thriving, do-it-yourself home-improvement and remodeling market.

          

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