Is Home Depot Stock a Good Buy?

Earnings are up but it pared revenue forecast


The Home Depot (NYSE: HD) stock and success story is pretty compelling.  In just over three decades the company has gone from startup hardware retailer to international powerhouse and Dow component.  But along with rival home improvement retailer and closest competitor, Lowe’s (NYSE: LOW), Home Depot stock has suffered mightily as the housing market reels.

So is Home Depot stock a good buy? It’s hard to say. After falling to a low in March 2009 low, Home Depot stock is up over 76% in the last year and a half. And more recently, the stock has really been on a tear, climbing +13% over the past three months (29). But with foreclosures continuing to weigh on the market and consumer spending weak, the run is certainly a bit odd.

So, can the home-improvement retailer’s shares keep delivering, or are we about to see this house burn down?  Here are the pros and cons of Home Depot stock.

Home Depot Stock – Earnings

Pro: In August the world’s largest home-improvement retailer reported solid year-over-year second-quarter financial results, with net earnings of $1.2 billion, or 72 cents per diluted share.  The EPS number beat consensus analysts’ forecasts by a penny. Those numbers bested net earnings of $1.1 billion, or 66 cents per diluted share, in the same period of fiscal 2009. Sales for the second quarter totaled $19.4 billion, a 1.8% increase from the year-earlier quarter.

Con: Although Home Depot’s second quarter beat estimates, they didn’t exactly blow the doors off of expectations.  Moreover, earnings came as a result of cost-cutting, and not stellar results from a top-line revenue increase.  Like most companies these days, Home Depot is running lean.  That means if there’s a marked slowdown in revenues, profits and the share price likely will suffer.

Home Depot Stock – Outlook

Pro: Cautiously optimistic outlook. In its August earnings release, Home Depot updated its fiscal 2010 guidance, saying it now expects total sales to be up about 2.6% for the year.  Good news?  Yes, but that’s not the whole story.

Con: As part of that cautiously optimistic outlook, Home Depot actually trimmed its revenue forecast due to lower sales expectations for the second half of the year.  CEO Frank Blake said that the company continues to see weakness in the professional segment and softer housing-related activity than predicted.  Black told analysts on the second-quarter earnings conference call that he wanted to “counsel caution as we enter the back half of the year.”

Home Depot Stock – Dividends

Pro: A solid dividend play. Investors seeking income have been nicely rewarded by Home Depot.  The company pays an annual dividend of 95 cents per share, which translates to a dividend yield of 3% based on the current value of the stock.  That’s not the biggest yield out there, but it is very competitive when compared to other Dow components.

Con: No real cons here on the dividend front, as Home Depot has proven a stalwart dividend play of late.

Home Depot Stock – Technical

Pro: Positive technical momentum. The trading action in HD shares has certainly been bullish.  The stock recently fought its way back above the short-term, 50-day moving average, and then it broke through its long-term 200-day moving average.  Although the stock is still a ways off its highs for the year, the current trading momentum is definitely bullish.

Con: Some traders think the recent technical buying spurt is unsustainable, and that HD shares are likely to come back down to earth soon.  If the current bullish wave starts to balk, it could mean a selloff in the stock toward support around the $28 level.

Home Depot Stock – Retail Environment

Pro: The home-improvement trade is hot. One big positive for HD stock is what’s been called the home-improvement trade.  Consumer spending on home upgrades has been red hot as depressed housing prices are keeping people from selling their homes.  Instead, homeowners are opting to fix up their homes and continue living in them.  If housing prices continue to remain under pressure, we could see more upside for HD.

Con: To be certain, the home improvement trade is for real; however, with limited cash on hand as a result of a still weak economy, the home-improvement trade is destined to be unsustainable.  We already saw the cautious words from CEO Black on the second half, and that could funnel down into a slowdown in HD shares.

Home Depot Stock – Sales

Pro: Improved same-store sales.  The all-important same-store sales metric — revenue at stores open at least one year — rose 1.7% in worldwide in the second quarter.  The trend here is definitely positive, and bodes well for the company’s fiscal health going forward.

Con: Although the same-store sales metric is positive, it’s not the blowout that you’d shareholders would hope to see.  From a trader’s perspective, it is not the kind of growth likely to fuel a sustained bull rush into the shares.

The Verdict on Home Depot Stock

The home-improvement trade is for real, and all you have to do is look at the recent performance of HD shares to know it.  The charts don’t lie in this business, and until we see HD shares begin to wane, it seems like the logical verdict is in favor of the pros.  Of course, next quarter’s earnings (due out Nov. 17) will likely set the stage for the shares going forward.  If the numbers are respectable, look for more upside in Home Depot  stock.  If not, we could see this fast-paced home stock begin to burn down.

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