Despite a weak housing market, The Home Depot, Inc. (HD) continues to deliver better than expected results. The world’s largest home improvement retailer reported second quarter earnings per share 5% ahead of the Zacks Consensus Estimate driven by solid same-store sales growth.
Management raised its earnings guidance for the remainder of 2011 following the strong quarter. This prompted analysts to revise their estimates higher too, sending the stock to a Zacks #2 Rank (Buy).
The company also pays a dividend that yields a solid 2.9%. Valuation is reasonable too, with shares trading well below the industry average.
Strong Second Quarter Results
The Home Depot reported better than expected results for the second quarter on August 16. Earnings per share came in at 86 cents, beating the Zacks Consensus Estimate of 82 cents. It was a stellar 19% increase over the same quarter in 2010.
Net sales rose 4% to $20.232 billion, ahead of the Zacks Consensus Estimate of $19.929 billion. Same-store sales were up a solid 4.3%.
Gross profit inched up from 33.9% to 34.0% of net sales. Operating income rose 12% as the company leveraged its selling, general and administrative expenses.
Raised Guidance
Following strong Q2 results management raised its earnings guidance for the remainder of 2011. The company now expects to earn $2.34 per share on sales growth of 2.5%.
This prompted analysts to revise their estimates higher, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2011 is now $2.35, a penny ahead of guidance. This represents 16% EPS growth over 2010.
The 2012 consensus estimate is currently $2.67, corresponding with 14% EPS growth.
Despite a weak housing market, analysts expect the home improvement industry to improve over the next few years given an aging U.S. housing base. The company is also expanding in the emerging markets and has a strong presence in both Mexico and China.
Because of The Home Depot’s relatively high degree of leverage, even modest sales growth can lead to double-digit profit growth. The company is also aggressively buying back stock, which will help drive EPS at a healthy clip for at least the next couple of years.
Returning Value to Shareholders
The Home Depot generates strong free cash flow and has been using this cash to return value to shareholders through stock buybacks and dividend hikes. It spent a whopping $2.25 billion in the first six months of 2011 buying back shares, for instance.
The company also pays a dividend that yields a stellar 2.9%. After aggressively raising it during the housing boom, Home Depot held its dividend steady throughout the Great Recession and raised it modestly in 2010 and 2011:
Reasonable Valuation
The valuation picture looks reasonable for Home Depot. Shares trade at 13.6x 12-month forward earnings, a significant discount to the industry average of 18.0x and a discount to its 10-year median of 15.2x.
Its price to sales ratio of 0.8 is in-line with the peer group.
The Bottom Line
The Home Depot continues to deliver solid results in spite of a difficult environment. With rising earnings estimates, strong growth projections, a solid 2.9% dividend yield and reasonable valuation, now could be a good time to get in.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
