Home Depot Stays Neutral

Zacks

We have maintained our long-term ‘Neutral’ recommendation on the world’s leading home improvement specialty retailer – The Home Depot Inc. (HD).

The condition of the global economy, higher interest rates, inflation and debt pressure have led to uncertainty among consumers that could impact their discretionary spending. Intense competition from specialty stores and mass retailers such as Lowe’s Companies Inc. (LOW) are additional causes for concern.

Moreover, Home Depot currently has a price-to-book ratio of 5.24 and price-to-sales ratio of 1.29, which is substantially above the peer group average of 3.82 and 0.68, respectively. Moreover, its long-term EPS growth rate of 13.7% is below the peer group average of 17.4%. We believe the shares are richly valued, which is the main reason we remain slightly cautious on the stock.

There are several positives however. Driven by positive sales growth at the company’s comparable stores along with improved operating margin, Home Depot’s earnings of $1.01 per share for the second quarter of fiscal 2012 climbed over 17% from the year-ago level of 86 cents. Moreover, quarterly earnings came ahead of the Zacks Consensus Estimate of 97 cents per share.

Despite unfavorable winter weather during the quarter, Home Depot reported an increase of 1.7% in its net sales. However, quarterly sales of $20,570 million were slightly below the Zacks Consensus estimate of $20,730 million.

Further, following the improved quarterly results, management raised its fiscal 2012 earnings guidance to $2.95 per share from $2.90 forecasted earlier. In addition, the company has reiterated its top line year-over-year growth of 4.6%.

The U.S. housing development and remodeling for average ticket size is gaining momentum whereas stabilization is seen in the big ticket size item. We believe that Home Depot’s strategy to focus on developing merchandising tools along with increasing investment in e-commerce will boost its top line, while gaining market share. Moreover, we expect the company’s new warehousing and transportation system will help boost its bottom line by improving the supply chain while minimizing costs.

Currently, Home Depot holds a Zacks #2 Rank which implies a short-term Buy rating.

Based on net sales, Home Depot Inc. is the world’s largest home improvement specialty retailer with over 2,200 retail stores across the globe, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. With the help of its stores, the company operates throughout the United States (including the territories of Puerto Rico and the Virgin Islands), Canada, China and Mexico and has more than 300,000 associates.

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