Past Performance: Home Depot (NYSE:HD) is a chronic "under promise, over deliver" company versus Wall Street expectations. Home Depot has not missed EPS expectations in the last four years. In the past four first quarters, Home Depot has only met expectations just once, beating EPS expectations the other three times. The out performance has dwindled over the years however, and Home Depot only met expectations last first quarter.
HD has a 52-week high of $71.45, just $2.50 roughly above current levels. The stock currently shows overbought on the technicals side as well. With resistance at the 52-week high and support at the $64.70 level, Home Depot seems to have more downside risk than upside potential.
Fundamentals: Currently, Home Depot trades with a P/E of 22.99, a Forward P/E of 16.95, a P/S 1.37, and a PEG ratio of 1.39. Comparatively, the consumer service sector trades with a current P/E of 21.2 and a Forward P/E of 25.1. The S&P 500 trades with a current P/E of 20.6 and a Forward P/E of 17.5. Using the current P/E, Home Depot looks overvalued.
Comparing the forward looking metrics such as the Forward P/E and PEG show the stock is slightly overvalued as well. The Forward P/E may be cheaper than the industry average, but the industry has a Forward P/E more than 40% higher than the S&P 500 average. That tells me that the industry as a whole has already been priced correctly in the short term and overvalued in the long term. Home Depot's Forward P/E is in line with the S&P 500, which combined with the other fundamentals doesn't make a strong case for a fair valuation looking out 52 weeks.
The Story: Home Depot has enjoyed the stagnate housing market. With potential home buyers unable to sell their current underwater homes, those home buyers are forced to live with what they have. Instead of buying a new home, homeowners are rehabbing their current homes. Home Depot capitalized off of that opportunity.
The home remodeling market has been healthy over the past few years, and Home Depot has been catering to contractors more and more to capture their business. HD has a "contractor desk" that assists contractors with any need they may have; whether it be ordering every single sheet of drywall or screws to running larger orders through the "bid room" to give contractors the best possible price they can. Home Depot understands that contractors are a core segment of the business, and HD is stepping up their game to capture more and more of that business.
However, Home Depot has a couple glitches on the balance sheet. Total liabilities have increased by over 5% YOY from January of 2011 to January of 2012. Also, long term debt has increased by over 20% in that same time frame. Those issues need to be addressed moving forward, and would help bring the PEG ratio back in line.
How To Play It: With the combination of weak technicals and weak fundamentals Home Depot looks prepared for a pullback. Home Depot may have the consumer focus in the right place, but the balance sheet needs more attention. With the housing market turning around, that will give HD a macroeconomic headwind to fight through as well. My personal 52-week price target: $59.20.
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.
Additional disclosure: Always consult with a registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.