Home Depot Inc (HD) Stock Is Overbought, But Not Overvalued

Take a closer look before you worry about the big progress Lowe's made against Home Depot last quarter

A week and a half ago, home improvement retailer Lowe’s Companies, Inc. (NYSE:LOW) posted fourth-quarter numbers that were unusually encouraging. The company, rarely able to keep up with bigger rival Home Depot Inc (NYSE:HD), mustered a 5.1% improvement in same-store sales last quarter. If nothing else, it was a much needed moral victory … one that left owners of HD stock wondering if a role-reversal might be in the works.

Before faithful Home Depot shareholders throw in the towel, however, they may want to take a closer, second look. The $180 billion behemoth still has a few tricks up its sleeve, and it’s still riding the same home-construction and even remodeling that has put Lowe’s back in a bullish light.

Home Depot Earnings, Outlook Is Fine

As a refresher, Home Depot earned $1.44 per share of HD stock on $22.21 billion in sales last quarter, topping both the bottom line estimate of $1.34 and top line estimate of $21.8 billion. And, in a very Lowe’s-like manner, Home Depot drove same-store sales growth of 5.8%. The only fly in the ointment, so to speak, was a lackluster outlook, though some observers suggest the retailer’s guidance was conservative.

They’re probably right. See, it wasn’t just luck that led Home Depot to another great quarter.

One area where the home improvement retailer really shined in its recently completed quarter was e-commerce; that arm saw 19% growth. Not bad for a product category that doesn’t lend itself (big, bulky items) to online shopping. It’s not just the ease of online ordering that’s proving beneficial to the company, however. Almost half of those online orders are picked up in a store, making it very likely that customers will make an additional purchase while they’re physically present.

More subjectively, and less objectively, the retailer continues to expand its footprint and maximize its productivity per square-foot. Of course, the recent 29% increase in its dividend payout isn’t too shabby either.

Point being, Home Depot stock is no slouch just because Lowe’s is making forward progress too.

Bullish Undertow for Home Depot Stock

The initiatives are well-timed, for two reasons.

One of them is the sustained growth of the residential construction market. Although uneven at times, sales of new homes last year were at their highest levels since 2007, when they were on their way down. Sales of existing homes reached their best levels since 2006 last year. Experts expect more growth this year tool, despite rising interest rates.

Underscoring this uptrend is the fact that the bulk of last quarter’s sales growth for HD stock last quarter was driven by pro sales … homebuilders and contractors.

It’s not just demand supported by low prices either. The Case-Shiller Index reveals last year’s average growth in home prices was the strongest full-year growth since 2013, up 5.8%.

The other tailwind working for Home Depot is perhaps the more powerful, though more obscured one … the rising interest in remodels as an alternative to a home purchase. The Leading Indicator of Remodeling Activity (LIRA), published by Joint Center for Housing Studies of Harvard University, suggests spending on home improvements and repairs will grow 6.7% this year, after rising 6.9% last year. All told, the country is projected to spend $317 billion on improvements to existing houses, keeping a steady flow of professional and DIYers walking through Home Depot’s doors.

Bottom Line for HD Stock

None of this is to suggest Home Depot is still the bulletproof company it was just a couple of years ago. It’s not. It has plenty of challenges ahead, and by extension, so does HD stock.

It’s a little too soon to close the books on Home Depot stock though. It may look and feel like the weaker player compared to how well Lowe’s did last quarter (and why), but one quarter isn’t enough to call the beginning of a paradigm shift.

In simpler terms, while HD shares may be a markedly overextended thanks to a 21% runup since early November, they’re not begging for a massive corrective move some observers may be saying they are. The company’s still a powerhouse, and as good if not better than alternative retail plays.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/home-depot-inc-hd-stock-overbought-not-overvalued/.

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