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Thanks to strength in the US housing market, home improvement giant Home Depot (NYSE:HD) posted terrific third quarter results. Revenues grew 4.6% year-over-year to $18.1 billion, easily exceeding consensus estimates. Earnings, excluding the closing of some unproductive stores in China, increased 23% year-over-year to $0.74 per share.

Increased productivity helped tremendously, as aggregate same-store sales grew 4.2% year-over-year, and US same-store sales increased 4.3% year-over-year, driven by higher average tickets and more transactions. Gross margins ticked up about 20 basis points year-over-year to 34.6%, reflecting the higher average ticket prices and better appliance sales. Appliance sales are a good indicator of consumer confidence in the housing market, in our view. Management noted that credit availability in the housing market remains constrained, though it appears to be improving. If the US can avoid the fiscal cliff, we expect credit to loosen slightly, especially if the broader economy recovers, resulting in further acceleration in the housing market.

The company continues to be a cash cow, as it has generated $4.4 billion in free cash flow year-to-date, returning over $3.3 billion via buybacks and $1.3 billion in dividends. Click here for our dividend analysis on Home Depot. Going forward, the company expects to repurchase $700 million of stock in the fourth quarter. The firm also raised its full-year guidance, boosting its full-year revenue growth rate to 5.2%, a solid increase from its previous 4.6% expected growth rate. Earnings per share, excluding the impact of store closures in China, are now forecasted at $3.03 per share compared to previous guidance of $2.95 per share. The company will also experience a tailwind from Hurricane Sandy, but the extent of the benefit remains difficult to quantify.

We liked the quarter, and we remain optimistic about the housing market heading into 2013. With the re-election of President Obama, the risk of a change in monetary policy has been greatly reduced, in our view, which could help keep mortgage rates low. Home Depot continues to take market share from Lowe's (NYSE:LOW), and we think appliances will be stronger now than in previous years, despite recent weakness at Sears (NASDAQ:SHLD) and Best Buy (NYSE:BBY). We remain on the sidelines for now, but point to Whirlpool (NYSE:WHR) as an undervalued idea levered to the recovering housing market. Please click here (PDF) to download our report on Whirlpool.

Source: Housing Market Strength Propels Home Depot