Further Gains Ahead for Home Depot
Two weeks ago, we took a look at two stocks—General Electric (NYSE: GE) and Generac Holdings (NYSE: GNRC)—that will profit from the increasing frequency of damaging storms like Hurricane Sandy.
You can add Home Depot (NYSE: HD) to that list. The home-improvement chain has benefited not only during the run-up to the storm—in which consumers dashed to their local Home Depot for batteries, plywood and other supplies—but also in the rebuilding process, which is now underway. The potential for a sustained recovery in the U.S. real estate market gives the stock even more upside.
Both trends were evident in the company’s fiscal 2012 third quarter results, which it reported yesterday.
Storm, Improving Housing Market Gave Home Depot a Lift in the Third Quarter
In the three months ended October 28, 2012, Home Depot’s sales rose 4.6%, to $18.1 billion from $17.3 billion a year earlier, beating the consensus forecast of $17.92 billion. Same-store sales rose 4.2%.
Earnings gained 1.4%, to $947 million from $934 million. Home Depot has spent $3.3 billion on share buybacks so far this year. As a result, earnings per share rose at a faster rate of 5%, to $0.63 from $0.60. Home Depot plans to repurchase a total of $4 billion of stock over the full year.
Without unusual items, Home Depot’s earnings rose 23.3%, to $0.74 a share, topping the Street’s estimate of $0.70. The strong performance prompted Home Depot to raise its full-year earnings estimate by 18%, to $2.92 a share.
Home Depot Can Expect More Storm-Related Gains in Q4
The U.S. east coast took the brunt of Hurricane Sandy on October 29, the day after Home Depot’s third quarter ended. But warnings of the storm’s approach had been issued as far back as October 24, when Sandy evolved into a category 1 hurricane in the Caribbean Sea. As a result, the storm added 40 basis points to the company’s same-store sales gain in the quarter, according to Forbes.
In addition, the company has roughly 300 of its 2,250 superstores in areas affected by the storm. That’s a higher concentration than chief competitor Lowe’s Companies (NYSE: LOW), with 200 of 1,725 outlets. As well, Home Depot’s prices are generally lower than Lowe’s, making it the likely prime beneficiary during the recovery.
In the earnings conference call, the company’s management said that they expect Sandy to add $360 million in total to the company’s sales, which is similar to the effect that Hurricane Irene had in 2011. Moreover, Barclay’s expects the storm to lift Home Depot’s same-store sales by 1% to 1.5% in the fourth quarter.
Resurgent Housing Market Is a Longer-Term Plus
“Our third-quarter results were better than we expected and reflected, in part, what we believe is the start of the path toward the healing of the housing market,” said Home Depot CEO Frank Blake in the earnings release.
Key indicators in the housing market remain below historical norms, but there have been encouraging signs in the past few months: homebuilders broke ground on a seasonally adjusted 872,000 new homes in September. That was up 15% from the same month in 2011 and the fastest growth rate since July 2008. As well, resale home sales dipped 1.7% in September from August—when sales hit a two-year high—but that was largely due to a lack of new listings. Sales for the month were still up 11% from September 2011.
If these improvements continue, the company will be in a great position to profit as buyers renovate their new digs, thanks to its lower prices and market dominance.
Prudent International Expansion Will Pay Off
The stock has already risen 67% in the past 12 months, and now trades at 21.3 times the company’s last 12 months of earnings. However, the upcoming lift from the Hurricane Sandy recovery and the possibility of strong gains from a housing rebound still give it strong growth potential.
Moreover, Home Depot still has lots of room to expand internationally—though it is taking a cautious approach to this. The company recently closed seven of its stores in China; Home Depot entered the country with 12 in 2006 but found its “do-it-yourself” approach to be incompatible with local tastes. It is now experimenting with some different approaches, including focusing on specialty flooring and décor stores. It also aims to bolster its online presence in the country, which will let it expand with much less cost than building new stores.
As well, the company is focusing on growing closer to home. It already operates 180 stores in Canada and 91 in Mexico. It sees the potential for 25 more stores in the latter, as well as 18 to 20 in Central America. As well, CFO Carol Tome has called Brazil “the most interesting” area in South America for the company.
Home Depot’s ongoing share buybacks will also help support the share price going forward. In addition, investors benefit from its $0.29-a-share quarterly dividend, which yields 1.82%.
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