Home Depot Is Where Investors Ought To Be

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After a good five years of caution thanks to an ailing housing market and tight fisted consumers, it looks like the real estate recovery is for real and consumers are spending more.

That's great news for Home Depot (NYSE: HD). In fact, that's what helped Home Depot post a healthy 18% spike in Q1 earnings and prompted the company to raise its full year outlook. CEO Frank Blake said the rebound is propelling HD on “the path to recovery.”

The world’s largest home improvement retailer expects solid second quarter earnings, and full-year earnings of $3.52 per share on revenue growth of 2.8%. That’s up from its prior view of $3.37 a share and a 2% increase in revenue.

But don’t be surprised if Home Depot performs even better than the upwardly revised numbers. The company has a reputation of providing conservative guidance, the Wall Street Journal notes. In 2012, Home Depot raised earnings projections three times.

A healing housing market is indeed credited for the rosy outlook. CFO Carol Tome told the WSJ the optimistic view is thanks to the declining number of homes “underwater” (worth less than what borrowers owe on their mortgages).

According to CoreLogic, the percentage of homes with negative equity fell from 25.4% in Q4 of 2012, to 21.5%, or 10.4 million homes.

“If you have equity in your home, you view your home as an investment and are more comfortable spending money on it,” Tome said. “If it’s underwater, you view your homes as an expense.”

Crushing the Competition

Home Depot is comfortably sprinting ahead of rivals.

Fiscal Q1 earnings for competitor Lowe’s Corp. (NYSE: LOW) rose 2.5%, but revenue was flat. Same store sales dipped 0.7%, while Home Depot’s rose 4.8%.

Lowe’s blamed the lackluster showing on a cooler and wetter than expected introduction to spring which “resulted in a delayed spring selling season which impacted our results in exterior categories.”

Home Depot was subjected to the same glum weather, yet still managed solid earnings. Analysts say Home Depot’s superior performance was due to "better execution, more effective marketing, competitive promotions and meaningful merchandising.”

In attempts to improve performance, Lowe’s has closed underperforming stores, tweaked management structure, shuffled products lines to better suit customers wants and reduced costs. Plus, the company now highlights everyday low prices rather than sales.

While Lowe’s reported EPS of $0.49 on revenue of $13.08 billion, 6 cents better than a year ago, analysts were looking for $0.51 EPS on revenue of $13.45 billion. 

The company maintained its full year forecasts, expects full-year same store to increase by 3.5%, and plans to open 10 new stores this year.

Shares are definitely worth watching. They have attracted a cache of big money investors including hedge funds First Pacific Advisors and SAC Capital.

On the other end of the spectrum, and in need of cautious watching, are shares of Sears Holdings (NASDAQ: SHLD).

The department store chain, which sell tools, home appliances and electronics as well as clothing, recently reported another dismal quarter.

The company lost $1.29 in Q1 of 2013, worse than the 60 cents Wall Street was anticipating. Revenue tumbled 9% to $8.45 billion, more than the expected $8.37 billion.

The decrease, the company said, was primarily because it has fewer Kmart and Sears full scale stores in operation. Also weighing on results was that stores opened at least a year turned in lower revenue. Additionally, the company blamed the separation of its Sears Hometown and Outlet business (which occurred in Q3 of 2012) for the drag.

The beleaguered department store chain said it's mulling shedding its protection agreement business in an effort to shore up cash. The unit runs the part of the business that sells service contracts that guarantees to fix or replace appliances should they fail within a certain time-frame.

New initiatives, which include a loyalty program called “Shop Your Way” and “WhyNotLeaseIt,” which allows shoppers unable to get credit the ability to lease big purchases like electronics, home appliances and furniture, has done little to goose sales.And store changes, including providing sales staff with iPads and iPods to help customer more efficiently, have had little effect.

Many question its future.

“Sears is becoming more irrelevant by the day," Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, told the Associated Press following the glum earnings report.

Prospects for the company’s and its some 2,500 retail operations in the United States and Canada are dreary. While Sears moved to restore profitably by slashing costs, reducing inventory, selling assets and spinning off others, stores continue to struggle.

The consensus view on Wall Street is Sears will continue to disappoint investors. 

Building on Success

Conversely, Home Depot is viewed much more favorably.

The retail behemoth had 19% of the U.S. home improvement retail market at the end of 2012, compared to Lowe’s 16.7%, data from Euromonitor International showed. That divide is expected to increase.

“Given the company’s strong internal momentum and a developing external tailwind in housing,” Credit Suisse expects Home Depot’s sales to accelerate this year and rates shares an “Outperform.”

Shares have risen to a near 52 week high and yield a good 1.97%.

A good home must be made, not bought. You can build on that truism by buying shares in a good home improvement company like Home Depot.

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Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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