Home Depot (HD)
is improving its prospects along with the economy, in part thanks to the mild winter. But a bet on the home improvement giant now is largely a bet, analysts say, on a continued upswing, despite questionable solidity in the housing sector.
The Home Depot is the world’s largest home improvement retailer based on net sales for the fiscal year ended Jan. 29, 2012, the company reports.
Home Depot stores average approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. As of the end of fiscal 2011, the Atlanta, Ga. company had 2,252 stores located throughout the United States, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, China and Mexico.
Net sales for fiscal 2011 increased 3.5 percent to $70.4 billion from $68 billion the year before, management noted in a recent filing. The increase reflected positive comparable store sales, they said, based on management initiatives, an improving economy and good weather.
“We believe that our sales performance has been, and could continue to be, negatively impacted by the level of competition that we encounter in various markets. We estimate our share of the U.S. home improvement market is approximately 25 percent,” management said.
The company competes against Lowe’s (LOW) in the hardware space but also against Sears (SHLD) and Best Buy (BBY) in appliance sales.
Home Depot is a $78.47 billion market cap stock in a sector, specialty retail, where the average is $6.23 billion. Its trailing 12-month P/E ratio is 20.92, above the sector average. The company’s five-year projected price-to-earnings-growth (PEG) ratio is 1.43, also above the sector.
HD has projected earnings per share growth over the coming year of 12.46 percent compared to 15.25 percent for the sector.
Analysts are mixed on the big-box hardware pioneer, with handful of buy and outperform calls mixed in among some neutral calls and at least one underperform. Raymond James, Longbow, UBS, Ned Davis Research and Citigroup all say buy. Standard & Poor’s Equity Research is at underperform.
Home Depot is doing everything right that it can, including revamping customer service and participating in the long-term trend toward home repair as houses age. But the market might have gotten ahead of itself on real estate in general, warns S&P.
“Although we view HD's balance sheet and free cash flow generation as strong, we remain concerned that the recovery in housing will take much longer than widely anticipated,” S&P analysts wrote on April 20. “We think the shares are overvalued.”
Home Depot next reports on May 17.
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