Source: Home Depot.
has delivered impressive results for long-term shareholders, not
only surviving the housing bust but thriving in its aftermath.
Investors have seen their stock hit new all-time record highs for
years now, with the big push higher last week in the wake of the
Home Depot earnings report
marking the latest in a long series of successes for the company.
Even with some experts doubting how much further the housing
recovery can go, there are several reasons to believe that Home
Depot stock could push even higher from here. Here are three of
1. Housing has continued to be strong, defying falling
expectations for future conditions in the industry.
For a long time, investors in Home Depot and other
home-improvement retailers have worried that last year's abrupt
rise in mortgage rates would snuff out the impressive recovery in
the housing market. Yet at least so far, there have been few
signs of sluggishness in housing. Just last week, data on housing
starts for the month of July showed a 16% jump, with annual rates
approaching the 1.1 million level. So far this year, overall
housing starts have climbed 22%.
Yet most economists still question whether the numbers are
sustainable, emphasizing the fact that much of the new building
activity has focused on multi-family housing like apartment
buildings. Moreover, the combination of higher rates and climbing
prices has pushed measures of affordability to their lowest
levels since before the financial crisis. With economists at
home-loan government-sponsored enterprise
cutting their forecasts for sales and construction by more than
10%, Home Depot investors are already weighing the possibility of
slowing growth in housing. Therefore, if the industry keeps
defying those dire predictions, Home Depot could surprise
investors as well and send the stock higher.
2. Some of Home Depot's competitors have struggled
lately, giving it a chance to poach their customers.
Sears' Craftsman is a big rival in tools, but it's fate is
uncertain. Image source: Sears Holdings.
In contrast to Home Depot's upbeat earnings report,
competitors have faced some problems.
announced its earnings last week, and Home Depot's main rival
reduced its sales-growth projections for the year by half a
percentage point, in stark contrast to Home Depot's own boost in
its earnings forecast. Lowe's said that air-conditioner sales
hurt its results, as the summer season has been unusually cool in
many parts of the country. Similarly,
continues to struggle, spinning off its most valuable assets but
still leaving the fate of its well-regarded
Craftsman line of tools
uncertain. And with Home Depot's smaller competitors, which focus
on niche areas ranging from hardwood flooring to carpeting and
outdoor deck materials, pressure on margins has led to
Home Depot has a competitive opportunity to take advantage of
its competitors' woes and pick up more business. If it can do so,
then shares could keep climbing as a result.
3. Home Depot has strong earnings growth potential that
can overcome a fairly high valuation.
Home Depot's valuation troubles some conservative investors,
with the big jump in share prices over the last week bringing the
company's forward earnings multiple for the current fiscal year
above 20. In a market that some see as toppy, such high multiples
suggest a lot of room to fall if the bull market comes to an
Source: Home Depot.
Unlike many of its Dow counterparts, however, Home Depot
actually has the growth potential to justify such a valuation.
Current expectations for 16% annual growth over the next five
years would lead to earnings more than doubling, and that would
quickly chop P/E ratios, even if the share price keeps climbing
at a modest rate. Fears about housing won't necessarily get in
Home Depot's way, as the company managed to grow even before home
prices started recovering.
Home Depot has done a good job throughout the past decade in
identifying areas to expand its business, and its execution has
been nearly flawless even through one of the most troubled times
in the nation's economic history. Even if conditions become
slightly less favorable, Home Depot has the opportunity to
capitalize on its past success and continue producing strong
results for its shareholders.
for the next decade
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3 Reasons Home Depot's Stock Could Rise
originally appeared on Fool.com.
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