Home Depot - Solid Housing Market And Sandy Boost Sales

Nov.14.12 | About: Home Depot, (HD)

Shares of Home Depot (HD) rose 3.6% in Tuesday's trading session, thereby providing some much needed support for the wider equity markets. The home improvement retailer gave a positive update for its full year of 2012, when reporting its third quarter results.

Third Quarter Results

Home Depot reported third quarter revenues of $18.13 billion, up 4.6% on the year. The sales growth is almost entirely driven by comparable store sales growth of 4.2%. The number of transactions rose by 1.7% on the year, with average ticket prices up 2.9% to $54.55. Revenues comfortably beat analysts consensus of $17.9 billion.

The company net earned $947 million, up 1.4% on the year before. Diluted earnings per share came in at $0.63 for the third quarter. The company took a non-recurring charge of $165 million, or $0.11 per share, related to the closure of 7 stores in China. Excluding these charges, net income rose 23.3% to $1.1 billion. Adjusted earnings per share came in at $0.74 per share, comfortably beating analysts consensus of $0.70 per share.

CEO and Chairman Frank Blake commented on the results, "Our third quarter results were better than we expected and reflected, in part, what we believe is the start of the path toward the healing of the housing market. I particularly want to thank all of our associates who are helping the communities impacted by Hurricane Sandy. They are working under difficult circumstances, often with their own lives and homes disrupted by the storm, and their efforts exemplify our core values."

Outlook

Based on the decent third quarter results, Home Depot raises its full year sales growth guidance to approximately 5.2%. Full year diluted earnings per share are expected to increase approximately 18% to $2.92 per share.

Full year adjusted earnings, excluding the $0.11 per share impact related to store closures, are expected to increase 23% to $3.03 per diluted share. Previously, Home Depot guided for annual profits of $2.95 per diluted share, while analysts thought the home improvement company would earn $2.98 for the year.

Home Depot expects to repurchase roughly $700 million in shares during the final quarter of the year.

Valuation

Home Depot ended its third quarter with $2.6 billion in cash and equivalents. The company operates with $10.8 billion in short and long term debt, for a net debt position of $8.2 billion.

Full year revenues are guided towards $74 billion. Diluted earnings per share of $2.92, translate into net earnings of $4.4 billion for the full year. After Tuesday's gains, Home Depot is valued at roughly $95.5 billion. This values the firm at roughly 1.3 times annual revenues and 21-22 times annual earnings.

Home Depot pays a quarterly dividend of $0.29 per share, for an annual dividend yield of 1.8%.

Investment Thesis

Year to date, shares of Home Depot have risen an incredible 51% on the back of the recovery of the US housing market. Shares steadily rose from $42 in January of this year, trading currently at the highest levels of the year, around $63 per share. Shares are approaching their all time highs around $70, set back in 1999.

Over the past five years, shares have roughly tripled. Shares traded as low as $20 in 2008 and 2009 during the financial crisis. Between 2009 and 2012, Home Depot consolidated annual revenues between $71.3 billion in 2009 and $74 billion in 2012, after some weakness in 2010. Net income almost doubled from $2.3 billion in 2009, to an estimated $4.4 billion this year. Home Depot retired roughly 7% of its shares outstanding over the period.

Home Depot is perfectly positioned to benefit from the rebound in the American construction sector this year. New home sales have risen to their fastest pace in the past two years, while construction activity is booming as well. The company raised its full year revenue growth target from 4.6% to 5.2%, partially driven by the boost which hurricane Sandy will provide. Last year, hurricane Irene added roughly $360 million in annual sales, roughly 0.5% of annual revenues.

While it is evident that the housing recovery is rather steady, I don't expect growth rates to approach those in the last years before the housing crisis. I think shares are fairly high valued on both price-earnings and dividend metrics. Furthermore, the company carries a reasonable debt load.

I remain on the sidelines on valuation concerns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.