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The Home Depot (HD) is the largest American retailer of home improvement and construction products and services. On August 20, 2013, it reported total sales of $22.5 billion, a 9.5% rise from the same quarter in the previous year.

Frank Blake, CEO of Home Depot, stated "The second quarter results exceeded our expectations as our business benefited from a rebound in our seasonal categories, continued strength in the core of the store and the recovering housing market in the U.S."

In this article, we have analyzed Home Depot in regard to how the recovering housing market in the U.S. will impact its future growth.

Recovery in housing market to boost sales

The U.S. economy is recovering from the 2009 crisis. Any uptrend or collapse in the housing market leaves a direct impact on the mortgage market, real estate and home material supply retail outlets. Home Depot, along with its competitors Lowe's (LOW) and Lumber Liquidators (LL), benefited from the rebounding housing market. The second quarter results of all three companies showed significant growth. Lowe's, the world's second largest home improvement company, and Lumber Liquidators reported sales of $15.7 billion, a 10.3% rise year over year, and $257.1 million, a 22.2% rise year over year, respectively.

According to IBISWorld, the current $164.4 billion housing market is expected to grow 3.1% annually over the next five years. Home Depot has wide area coverage with a large number of stores across the U.S. and a market share of 10.53%, higher than Lowe's and Lumber Liquidators' 8.65% and 6%, respectively. Thus, considering the above factors and being the largest home improvement company, we expect Home Depot to benefit more than its competitors.

Monetizing opportunity by improving store productivity

Lowe's bought Orchard Supply Hardware's 72 stores in August 2013 in order to expand its presence in the U.S. Additionally, Lumber Liquidators plans to open a total of 16 to 20 store locations in the second half of this year. Even though Lowe's and Lumber are expanding their store count, they still lag behind Home Depot total stores.

Company

Number of stores across the U.S.

Home Depot

2,200

Lowe

1,712

Lumber Liquidators

300

Unlike its competitors, Home Depot is currently focusing on improving its current stores' productivity rather than adding new stores. It has made significant technology upgrades in its store operations to enhance customer service. The company has installed self-service checkout machines, which reduce customer wait time and make it more customer-friendly. This should help the company reduce and shift staff to other tasks. It also upgraded its online shopping website that provides a larger platform for product variety than what's available in stores. The technology upgrades can help the company save billions as it can reduce the number of employees needed for assistance. This can help the company to attract new customers and provide a better service, boosting its productivity this year and coming years.

The technology upgrades and the revenue generated from the current stores are likely to show a positive impact on the company's net earnings. Looking at the past two year's constant growth of around 16%, we assume net earnings of $5.2 billion for this year and $6.1 billion for next year.

Valuation

Company

Trailing PE

Forward PE

Expected Earnings growth

Expected 2014 EPS

The Home Depot

21.95

17

29.11%

$4.36

Lowe's

23.54

17.35

35.67%

$2.64

Lumber Liquidators

43.99

29.99

46.68%

$3.31

Source: Yahoo Finance

Home Depot currently trades at a PE ratio of 21.95 but its forward PE is 17 indicating a potential growth of 29.11% with an expected EPS of $4.36 for 2014.

Conclusion

Home Depot has responded well to the improving macro-economic factors. The company is likely to benefit from the recovering housing market over the next five years. Looking at the above valuation metrics, Home Depot signifies a strong growth potential compared to its rivals, making it a considerable option for investors.

Source: Home Depot: Reasons For Bulls To Be Happy

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta D., one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.