U.S. Markets closed

Home Depot (HD) Emerges as a Favorable Pick: Time to Hold?

Zacks Equity Research

Home improvement retailer, Home Depot Inc. HD continues to maintain its position in investors’ good books, with the stock witnessing fantastic growth of 13.3% in the past one year. This growth stands to outperform the Zacks categorized Building Products – Retail/Wholesale industry’s increase of 8.9% in the same period. Further, this Zacks Rank #3 (Hold) company’s growth potential is evident from its favorable VGM Score of ‘B’. That said, let’s find out more about the stock.

Home Depot’s success story can mainly be attributed to the consistent gains from improving customer experience, solid execution and steady housing market recovery. This leading player in the highly-fragmented home improvement industry has been revamping itself by concentrating on square footage growth and maximizing productivity from its existing store base. Additionally, the company has implemented significant changes in its store operations to make them simpler and more customer-friendly. We believe these initiatives will drive more traffic to its stores.

Further, Home Depot remains focused on developing merchandising tools and increasing investment in eCommerce to boost top-line growth and enhance market share. Moreover, it is on track to achieve its long-term dividend payout, share repurchase and return on investment targets, given its disciplined capital allocation strategy. The company targets dividend payout ratio of about 50% of earnings and plans to complete the remaining $11 billion share repurchase authorization by fiscal 2017 end. It also aims to achieve a return on invested capital of 35% by fiscal 2018.

Additionally, the company has been implementing several initiatives to drive long-term growth. In response to the evolving retail environment, where digital and physical stores go hand in hand, the company remains keen on building its interconnected capabilities. To do this, Home Depot is constantly investing in content, developing its website and improving mobile experience to enhance customer experience. We expect these initiatives to drive the company’s top-line and bottom-line growth in the long run.

Coming to its solid earnings performance, Home Depot has been reporting strong financial figures since 2008, with steady improvement in revenues, earnings per share and net income. The company retained its four-year long trend of consistently beating earnings estimates, by delivering a positive earnings surprise in third-quarter fiscal 2016. Additionally, the company’s top-line was ahead of estimates and grew year over year.

Home Depot, Inc. (The) Price, Consensus and EPS Surprise

Home Depot, Inc. (The) Price, Consensus and EPS Surprise | Home Depot, Inc. (The) Quote

However, intense competition and a soft economic recovery may prove deterrents, pushing back home improvement projects. Further, Home Depot’s significant exposure to international markets makes it vulnerable to currency headwinds – posing concerns for the company.

Stocks to Consider

Some better-ranked retail stocks include The Children's Place Inc. PLCE, sporting a Zacks Rank #1 (Strong Buy), Foot Locker Inc. FL and Zumiez Inc. ZUMZ, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place, with a long-term earnings growth rate of 10.3%, has surged nearly 61.5% in the past one year.

Foot Locker, with a long-term earnings growth rate of 9.7%, has returned 16.3% in the past one year.

Zumiez has jumped nearly 17% in the past one year. The stock has a long-term earnings growth rate of 15%.

Zacks' Top Investment Ideas for Long-Term Profit

How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Home Depot, Inc. (The) (HD): Free Stock Analysis Report
Zumiez Inc. (ZUMZ): Free Stock Analysis Report
Foot Locker, Inc. (FL): Free Stock Analysis Report
Children's Place, Inc. (The) (PLCE): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research