The Home Depot Inc. (HD), the world's largest home improvement retailer, remains on our Neutral list with a target price of $80.
Home Depot is a leading player in the highly-fragmented home improvement industry. The company has been revamping itself by concentrating on square footage growth and maximization of productivity from its existing store base.
In addition, the company has implemented significant changes to its store operations to make it simpler and more customer-friendly. We believe these initiatives will induce more traffic to its stores while boosting its top line.
Furthermore, Home Depot follows a disciplined capital allocation strategy, focused on making investments to develop its business, while using the excess cash to enhance shareholder returns via paying dividends and share buybacks.
Looking at the recent quarter, Home Depot posted stronger-than-expected first-quarter earnings, driven by the much-awaited recovery in the housing market. Following a strong performance in the quarter, management raised its sales and earnings forecasts for fiscal 2013. This triggered a positive movement in the Zacks Consensus Estimate, which has been showing an upward trend over the last 30 days.
With a positive surprise of 7.7% in the first quarter, Home Depot has now surpassed the Zacks Consensus Estimate for four consecutive quarters. The average surprise for the trailing four quarters stands at 5.6%. We expect the company to maintain this trend of posting positive earnings surprises in the years ahead, based on the recent recovery in the housing market together with an encouraging outlook.
On the other hand, first quarter earnings for Home Depot’s primary competitor, Lowe’s Companies Inc. (LOW) came in below expectations. The company posted earnings of 49 cents per share, missing the Zacks Consensus Estimate of 51 cents.
However, we remain slightly cautious on the stock performance of Home Depot due to a sluggish economic recovery impacting discretionary spending and intense competition from specialty stores and mass retailers. The company also remains vulnerable to risks of foreign operations, mainly currency fluctuations.
Given the pros and cons of the stock, we prefer to remain on the sidelines and maintain our Neutral recommendation. However, the company currently holds a Zacks Rank #2 (Buy), given its upbeat performance and positive surprise trend.
Other Stocks Worth Considering
Other stocks worth considering in the home improvement retail industry are Lumber Liquidators Holdings Inc. (LL), which has a Zacks Rank #1 (Strong Buy), and Builders FirstSource Inc. (BLDR) that carries a Zacks Rank #2 (Buy).
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