(HD) Home Depot – Growth And Income – Zacks Rank Buy

Home Depot Inc. (HD) has an impressive record of beating quarterly earnings expectations, which it continued in its fiscal second quarter 2012 by surpassing the Zacks Consensus Estimate by 4.1%. The home improvement retailer has also been paying a quarterly dividend for over 100 consecutive quarters, currently yielding nearly 2.05%.

Shares of this Zacks #2 Rank (Buy) have gained approximately 79.3% since October 3, 2011 on the back of robust top-line growth, continued upside in comparable store sales, a raised fiscal 2012 outlook and a decent dividend yield.

Fiscal 2012 Second Quarter Beats

On August 14, Home Depot announced fiscal 2012 second-quarter earnings of $1.01 per share, surpassing the Zacks Consensus Estimate of 97 cents. Quarterly earnings climbed 17.4% from last year’s 86 cents, primarily driven by comparable-sales growth and a strong operating performance.

Net sales inched up 1.7% to $20,570 million, but fell short of the Zacks Consensus Estimate of $20,730 million. Sales at the company’s comparable stores marginally improved 2.1%, while comparable store sales in the U.S. grew 2.6%.

Gross profit increased 2.2% to $7,026 million from $6,876 million in the prior-year quarter. Consequently, gross profit margin expanded by 20 basis points (bps) to 34.2%.

Operating profit grew 12% to $2,569 million, compared with $2,294 million in the year-ago period. Operating margin expanded 120 bps to 12.5% compared with 11.3%. The improvement in operating margin was primarily driven by elevated gross profit margin and effective cost management.

Raised Outlook

Following the strong quarterly results, management raised its fiscal 2012 earnings guidance to $2.95 per share, an increase of 19% from last year’s $2.47 and up from the earlier forecast of $2.90.

Earnings Momentum Increases

Following Home Depot’s sturdy earnings beat and encouraging outlook, analyst sentiments have remained favorable. The Zacks Consensus Estimate for fiscal 2012 rose 1.7% to $2.95 per share in the last 30 days as 11 of 20 estimates moved higher. This represents year-over-year growth of 19.6%.

The Zacks Consensus Estimate for fiscal 2013 increased 1.5% to $3.36 per share over the same time frame, as 19 of 23 estimates moved upward, reflecting growth of 13.7% year-over-year.

Stable Dividend

Home Depot rewards its shareholders through regular quarterly dividends and share repurchases. Recently, the company announced a quarterly dividend of 29 cents per share. This yields a solid 2.05%, while the company has a payout ratio of 40%. In contrast, the average dividend yield of the industry is 0.5%.

Last quarter, the company bought back nearly 23.6 million shares, valued at approximately $1.5 billion. Through the rest of the fiscal year, the company intends to repurchase shares worth $1.4 billion.

Reasonable Valuation

Valuation looks reasonable for Home Depot, with shares trading at 19.2x 12-month forward P/E, on par with its peer group average. However, on a price-to-book basis, shares are currently trading at 4.9x, a 40% premium to the peer group average of 3.5x.

Nevertheless, the stock also looks attractive given a trailing 12-month ROE of 23.8%, which is higher than the peer group average of 13.5%. The company’s long-term estimated earnings per share growth rate also remains strong at 13.7%.

Chart in a Growth Trend

Charts of this home specialty retailer show a continuous rise in the stock price since October 2011, gaining nearly 79.3% and reaching its 52-week high of $57.18 on August 17, 2012. The stock has consistently fared better than its 200-day moving average since October 18, 2011. Barring occasional pullbacks, the stock has also traded above its 50-day moving average since October 5, 2011.

With a market capitalization of $85 billion, Home Depot has also outperformed the S&P 500 Index since September 19, 2011. The year-to-date return for the stock is roughly 34.4% compared with a 10.7% return from the S&P 500 index.

Based in Atlanta, Georgia, Home Depot is the world’s largest home improvement specialty retailer with 2,252 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. The company typically serves three primary customer groups: Do-It-Yourself (D-I-Y), Do-It-For-Me (D-I-F-M) and Professional Customers since 1978. The company operates across all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, 10 Canadian provinces, Mexico, and China.

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