Enjoy the Sale on Home Depot

by Kyle Woodley | May 15, 2012 11:53 am

Depending on the time of year, visitors to Home Depot (NYSE:HD[1]) will find discounts on outdoor furniture, Christmas decorations or light fixtures.

But if you hurry in today, you’ll find the whole company’s on sale!

HD shares slid as much as 4% Tuesday on a “disappointing” first-quarter report[2]. Of course, said report included:

The company’s earnings, after backing out a one-time benefit, hit 65 cents, matching analyst estimates, and the new forecast for fiscal-year earnings now puts Home Depot in range to please Wall Street.

That disappointment? It came in revenues, which were expected to hit $17.96 billion.

In other words, Tuesday’s share drop — which looks to finish as one of Home Depot’s worst of the year — came on a miss of about $150 million (sounds big), or less than 1% (oh wait, really isn’t). And that miss came about, by Home Depot’s accounts, because warm weather brought people to stores unusually early and helped juice the previous quarter’s earnings. So really, HD still saw the business — it just wasn’t parceled out in the Wall Street calendar-friendliest of ways.

But investors’ pouting can be your profit, as Tuesday’s selloff has provided a nice little dip for what’s otherwise a solid investment.

Home Depot, the country’s largest home improvement retailer, and competitor Lowe’s (NYSE:LOW[3]) enjoy about as much of a duopoly in the home-improvement business as AT&T (NYSE:T[4]) and Verizon (NYSE:VZ[5]) do in wireless. Maybe even better.

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HD and LOW have shot out to triple-digit gains since the depths of the financial crisis, including market-doubling returns in the mid-teens thus far in 2012. And Home Depot itself has outpaced Lowe’s for much of the way.

Why are they doing so well? Home Depot and Lowe’s have continued to benefit from a downright sluggish housing market. People need home improvement and furnishing goods as they’re trying to refresh what they’ve already got, whether it’s because they know they’re stuck in that same old house or because they’re trying to make it stand out in the market.

If home-buying does pick up, HD and LOW could suffer, but for now there’s little reason for roaring optimism on the housing front.

There’s plenty to like about Home Depot’s numbers going forward, too. It’s expected to hike earnings in the mid-double digits for the next couple years, and considering HD’s track record the past couple of years, those projections are about as dependable as projections can be. After Tuesday’s haircut — which went from about 4% at the open to about 2% as many investors had a cup of coffee and cleared their heads — HD was trading at about 16 times fiscal 2013 earnings and 15 times fiscal 2014 earnings, which isn’t nearly as frothy as its TTM valuations of late.

Plus, HD shells out a dividend of 29 cents per share — good for a healthy 2.4% yield. Better yet, the company has upped its payout almost 30% since the financial crisis, so it’s likelier than not you’ll see similar behavior moving forward.

Home Depot clearly has a lot to offer, “disappointing” earnings or not. Just let the pessimistic headlines do the discounting.

Kyle Woodley[6] is the assistant editor of InvestorPlace.com[7]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[8].

  1. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  2. “disappointing” first-quarter report: http://investorplace.com/2012/05/home-depot-revenue-misses-forecasts/
  3. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  4. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  5. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  6. Kyle Woodley: http://investorplace.com/author/kyle-woodley/
  7. InvestorPlace.com: http://investorplace.com/
  8. @KyleWoodley: https://twitter.com/#%21/kylewoodley

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