When you think of home-improvement stores, the first name that comes to mind is almost certainly Home Depot (NYSE:HD). The company essentially started the concept of a superstore aimed at the do-it-yourself consumer, and though rival Lowe’s (NYSE:LOW) was the one retailer that actually managed to battle Home Depot on its own turf, the Atlanta-based original DIY superstore still holds the top spot in the space.
In terms of recent share price performance, HD has been on fire. Over the past three months, shares have surged nearly 20%, and that rapid rise has some bearish investors wondering just how much more upside is left. Still, others think the stock still has more room to run. Here are the stocks’ pros and cons:
Pros
Outstanding earnings. Early this week, Home Depot reported a 72% surge in fiscal fourth-quarter profit, and a 3.9% increase in comparable-store sales. The company said it finished the quarter with strong sales, thanks to brisk demand for snow-blowers and shovels after unusually heavy winter storms. Home Depot also saw strong sales of big ticket items such as appliances. The stellar results were accompanied by a confirmation of the company’s positive 2011 outlook.
Built-out dividend. Income hounds may have a sound reason to add HD shares to their portfolios, as the company also announced it was boosting its dividend by nearly 6%. Home Depot reiterated its goal to raise its payout every year, as its goal is to return 40% of its earnings to shareholders through dividends. The current payout is closer to 50% right now, and that means company executives think per-share earnings growth will outpace payout increases.
Focused management. Home Depot’s been making a lot of changes to its operations, and that’s been due to a focused management team intent on nailing down areas that can be improved. One such example is the elimination of suppliers sending trucks full of merchandise directly to stores, where workers had to unload them. The company now has added 19 centralized distribution centers, and that’s helped to free up store employees for the more important task of helping customers.
Cons
Housing market metrics. Perhaps the only real con when it comes to Home Depot is the housing market itself. Although metrics in the space have been depressed for several years, the latest news confirms a continuation of the sector’s difficulties. Sales of new U.S. homes fell significantly in January, a not-too-positive harbinger of things to come for the housing market in 2011. New home sales dropped to a seasonally adjusted rate of 284,000 homes during the first month of the year, according to the Commerce Department. That’s down from 325,000 in December and less than half the 600,000-a-year pace that economists view as healthy.
If the monthly data on new home sales were isolated, it wouldn’t be worrisome. However, the falling number in 2010 represents the fifth consecutive year that new-home sales have declined after hitting record highs during the housing boom. The data show buyers purchased 322,000 new homes last year, the fewest annual total on record going back 47 years. Add to this downbeat metric the fact that mortgage applications now are near their lowest levels in 15 years, and you get an image of a stagnant housing market not likely to help HD shares power higher.
Verdict
Despite the aforementioned negatives in the housing space, Home Depot shares have managed to keep pushing higher. There’s no doubt that the stock has bucked the wider trend lower in housing-related sectors, and that’s a very positive sign for the company going forward. If we even catch a whiff of improvement in the housing space from here, it could mean even more upside for home improvement stocks – and especially for the No. 1 player in the space.
Sure, housing remains tough, but investors also remain willing to knock on HD’s door. The verdict here is clearly in favor of the pros.
At the time of this writing, Jim Woods had no positions in any of the securities mentioned here.
