The Home Depot Inc.
), the world's largest home improvement retailer, remains on our
Neutral list with a target price of $80.
Home Depot is a leading player in the highly-fragmented home
improvement industry. The company has been revamping itself by
concentrating on square footage growth and maximization of
productivity from its existing store base.
In addition, the company has implemented significant changes
to its store operations to make it simpler and more
customer-friendly. We believe these initiatives will induce more
traffic to its stores while boosting its top line.
BUILDERS FIRSTS (BLDR): Free Stock Analysis
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Furthermore, Home Depot follows a disciplined capital allocation
strategy, focused on making investments to develop its business,
while using the excess cash to enhance shareholder returns via
paying dividends and share buybacks.
Looking at the recent quarter, Home Depot posted
stronger-than-expected first-quarter earnings, driven by the
much-awaited recovery in the housing market. Following a strong
performance in the quarter, management raised its sales and
earnings forecasts for fiscal 2013. This triggered a positive
movement in the Zacks Consensus Estimate, which has been showing
an upward trend over the last 30 days.
With a positive surprise of 7.7% in the first quarter, Home Depot
has now surpassed the Zacks Consensus Estimate for four
consecutive quarters. The average surprise for the trailing four
quarters stands at 5.6%. We expect the company to maintain this
trend of posting positive earnings surprises in the years ahead,
based on the recent recovery in the housing market together with
an encouraging outlook.
On the other hand, first quarter earnings for Home Depot's
Lowe's Companies Inc.
) came in below expectations. The company posted earnings of 49
cents per share, missing the Zacks Consensus Estimate of 51
However, we remain slightly cautious on the stock performance of
Home Depot due to a sluggish economic recovery impacting
discretionary spending and intense competition from specialty
stores and mass retailers. The company also remains vulnerable to
risks of foreign operations, mainly currency fluctuations.
Given the pros and cons of the stock, we prefer to remain on the
sidelines and maintain our Neutral recommendation. However, the
company currently holds a Zacks Rank #2 (Buy), given its upbeat
performance and positive surprise trend.
Other Stocks Worth Considering
Other stocks worth considering in the home improvement retail
Lumber Liquidators Holdings Inc.
), which has a Zacks Rank #1 (Strong Buy), and
Builders FirstSource Inc.
) that carries a Zacks Rank #2 (Buy).