We have maintained our long-term 'Neutral' recommendation on the
world's leading home improvement specialty retailer -
The Home Depot Inc
. (
HD
).
The condition of the global economy, higher interest rates,
inflation and debt pressure have led to uncertainty among consumers
that could impact their discretionary spending. Intense competition
from specialty stores and mass retailers such as
Lowe's Companies Inc
. (
LOW
) are additional causes for concern.
Moreover, Home Depot currently has a price-to-book ratio of 5.24
and price-to-sales ratio of 1.29, which is substantially above the
peer group average of 3.82 and 0.68, respectively. Moreover, its
long-term EPS growth rate of 13.7% is below the peer group average
of 17.4%. We believe the shares are richly valued, which is the
main reason we remain slightly cautious on the stock.
There are several positives however. Driven by positive sales
growth at the company's comparable stores along with improved
operating margin, Home Depot's earnings of $1.01 per share for the
second quarter of fiscal 2012 climbed over 17% from the year-ago
level of 86 cents. Moreover, quarterly earnings came ahead of the
Zacks Consensus Estimate of 97 cents per share.
Despite unfavorable winter weather during the quarter, Home
Depot reported an increase of 1.7% in its net sales. However,
quarterly sales of $20,570 million were slightly below the Zacks
Consensus estimate of $20,730 million.
Further, following the improved quarterly results, management
raised its fiscal 2012 earnings guidance to $2.95 per share from
$2.90 forecasted earlier. In addition, the company has reiterated
its top line year-over-year growth of 4.6%.
The U.S. housing development and remodeling for average ticket
size is gaining momentum whereas stabilization is seen in the big
ticket size item. We believe that Home Depot's strategy to focus on
developing merchandising tools along with increasing investment in
e-commerce will boost its top line, while gaining market share.
Moreover, we expect the company's new warehousing and
transportation system will help boost its bottom line by improving
the supply chain while minimizing costs.
Currently, Home Depot holds a Zacks #2 Rank which implies a
short-term Buy rating.
Based on net sales, Home Depot Inc. is the world's largest home
improvement specialty retailer with over 2,200 retail stores across
the globe, offering a diverse range of branded and proprietary home
improvement items, building materials, lawn and garden products,
and related services. With the help of its stores, the company
operates throughout the United States (including the territories of
Puerto Rico and the Virgin Islands), Canada, China and Mexico and
has more than 300,000 associates.
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
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