Home Depot Is Back With A Bang

Satarupa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After lots of struggle, it seems that the housing industry has finally begun to show signs of improvement, as everything is going well for the industry.  The extremely favorable mortgage rates, which have sunk even lower this week; the remarkable drop in the foreclosure filings in January, which has reached the lowest level since April 2007; the tight supply of both new and previously owned homes available for sale; and the overall improvement in the economy, has resulted in a surge in home prices, the biggest annual increase since the second quarter of 2006. As the housing market is slowly recovering, homeowners are getting more confidence to spend on their homes, and thus companies across all segments of this industry are experiencing remarkable improvement in their earnings. One such company is The Home Depot (NYSE: HD), the world’s largest home improvement chain, which posted better than expected earnings in its fourth quarter reports. Before digging deep into the company’s fourth quarter earnings, let’s first have a look at the overall industry scenario.

Recent improvements in the Home Industry:

Recently, there has been a remarkable improvement in the US housing industry. The number of new homes sold in January surged almost 16% from December and nearly 30% from a year earlier. According to the Commerce Department, these numbers have reached their highest level in more than 4 years, and are well above the forecasts. Also, as per The National Association of Realtors, previously-owned homes have been sold at an annual pace of 4.92 million homes, which is 9% higher than the same period last year. The increased demand from buyers and a drop in sales of distressed homes, such as those in foreclosure, have resulted in a 12.3% surge in home prices and have marked the biggest percentage gain since January 2005.

The rebounding housing sector has been an important factor behind the improving performance of most of the companies in this sector. The nascent recovery in the housing sector and rebuilding efforts after Hurricane Sandy is the dominant factor behind Home Depot's strong quarter performance.

This quarter:

Home Depot reported accelerating growth in the fourth quarter earnings, as its bottom line beat expectations and surged 36% to $1.0 billion, or $0.68 per share, from $774 million, or $0.50 per share a year earlier. Excluding a one-time gain, the company earned $0.67 per share. The top line also jumped 13.9% to $18.2 billion, beating analysts’ expectation of $17.7 billion.  This was backed by the 7% jump in sales at stores open for at least a year from a year earlier. The company reported in their fourth quarter that the average amount spent by each of their customers per shopping trip rose 5.6%, and their online sales also had a "strong" holiday season. The recent development in the housing sector catalyzed the growth in the company’s top and bottom lines.

As I have mentioned earlier, Home Depot is not the only company that is posting strong quarterly results.  Companies across all segments are enjoying the recent developments in the housing sector. Home Depot’s rival Lowe's (NYSE: LOW) recently reported their fourth quarter earnings, beating analysts’ expectations. The company reported a net income of $288 million, or $0.26 per share, which fell 11% from last year’s quarter, but still beat analysts’ expectations of $0.23 per share. The company also reported revenue of $11.63 billion, which is higher than the analysts’ expectation of $10.85 billion. With the development in the housing sector, Lowe's, which operates 1,754 stores in the US, Canada and Mexico, expects that their fiscal 2013 net income will rise to $2.05 per share, and as a result of their strong future outlook the company also experienced a surge in their share price.  Also, Lumber Liquidators (NYSE: LL), the largest specialty retailer of hardwood flooring in North America, reported strong fourth quarter earnings. Its top line jumped 20.8% to $210.7 million as the comparable store net sales increased 13.2%, backed by a 9.1% increase in the number of customers invoiced and a 3.9% increase in the average sale.

Foolish bottom line:

I think investors in Home Depot should be having a party after the company posted such strong earnings. The company raised its quarterly dividend by 34%, to $0.39 per share, and approved a $17 billion stock repurchase. The company also forecasts $3.37 of 2013 EPS, which is well above analyst expectations. The company has managed to beat its rival Lowe’s in sales for the 15th straight quarter and with the improving housing sector. I think this stock is one to watch out for.


sattybose has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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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