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Summary

  • HD currently trades at just under 15x forward earnings and offers shareholders a yield of 2.47%.
  • HD's dividend behavior has demonstrated an average 3-year growth rate of 29.33%.
  • Although HD's recent trend behavior signals a long-term selling mode for most investors, a turnaround may occur if the company can deliver solid Q1 earnings on May 20.

When it comes to retail sales numbers, any considerable impact by one or more particular sectors in the most recent month's gains should most likely boost the near-term performance of most of the stocks in that particular sector. According to the most recent numbers, retail trade sales were up 1.1% from February 2014 and up 3.7% from last year while auto and other motor vehicle dealers and non-store retailers were up 9.5% and 7.8% respectively from last year.

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(Source: US Census Bureau)

With that said, the retail sales numbers for March 2014 demonstrated some fairly solid gains that were due in large part to the performance of a number of companies who have presence in both the building materials and garden equipment sectors. As the direct result of that particular sector-based performance, I wanted to highlight a number of reasons as to why I've decided to remain long on one company that actually has a very strong presence in both sectors and that company is, Home Depot (NYSE:HD).

Recent Performance and Trend Behavior

On Tuesday, shares of HD, which currently possess a market cap of $103.83 billion, a forward P/E ratio of 14.0, and a dividend yield of 2.48% ($1.88), settled at a price of $75.89/share.

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Based on their closing price of $75.89/share, shares of HD are trading 3.48% below their 20-day simple moving average, 3.53% below their 50-day simple moving average, and 2.06% below their 200-day simple moving average. It should be noted that these numbers indicate a short-term and mid-to-long term downtrend for the stock, which generally translates into a selling mode for most near-term traders and many long-term investors.

That being said, I actually think the recent sell-off creates a slight buying opportunity, and for those of you who may be in the market for a home improvement play that offers investors a 2.4%+ yield, this may very well be a solid pick to add to your portfolio especially ahead of the company's upcoming earnings due out May 20.

A Look Ahead To Home Depot's Upcoming Earnings

When it comes to the company's upcoming earnings, there are a number of things potential investors should consider. For example, analysts are currently calling for HD to earn $1.00/share in terms of EPS (which is $0.27/share higher than the company had reported during Q4 2013 and $0.17/share higher than the company had reported during Q1 2013).

In order to meet and or exceed its quarterly EPS estimates, I'd like to see an increase in the company's total sales (within the range of 1.5% or $265.5 million on the low side and 3% or $530 million more on the high side as compared to the $17.7 billion in total sales that were demonstrated during Q4 2013), a fair increase in customer transactions (an increase of +2% or 6.32 million on the low side and +5% or 15.8 million or more on the high side as compared to Q4 2013), and lastly an increase in the company's gross profit (an increase of +3% or $185.76 million on the low side and +4.5% or $278.64 million or more on the high side as compared to Q4 2013).

If the above-mentioned criteria is met and/or exceeded, there's a very good chance that current EPS estimates could come in line or may even be surpassed. If one or more of the above-mentioned criteria aren't met, there's a chance the company's quarterly performance could be negatively impacted.

Comparative Forward P/E Ratios Clearly Set Home Depot Apart From At Least One Of Peers

Although the above referenced numbers indicate a long-term downtrend for the company's stock, I actually think its share price of $75.89/share offers investors a considerable point of entry. Why? Well, I think that when a company's shares are trading at a much better forward P/E ratio than that of their sector-based peers, a great buying opportunity is created for most long-term investors.

As of Tuesday's close, Home Depot's forward P/E ratio of 14.80 was much lower than the forward P/E ratio of Lumber Liquidators (NYSE:LL) (forward P/E ratio of 19.53 as of 4/15), which signals a greater level of affordability for those who may be looking to establish a position in Home Depot versus those who may be looking to establish a position in Lumber Liquidators.

A Few Things To Note When Comparing Home Depot To Lowe's

To be perfectly honest, both companies trade at very similar forward P/E ratios (Home Depot trades at 14.8x forward earnings versus Lowe's (NYSE:LOW), which trades at just under 14.7x forward earnings) and therefore I consider both to be evenly matched using this method of comparison.

Although both companies are fairly even when it comes to the forward earnings multiple at which they both trade, there are two categories that actually set Home Depot apart from Lowe's and they are dividend yield and PEG ratio. For instance, and as of April 15th's close, shares of Home Depot possessed a PEG ratio of 1.23 while yielding 2.48% ($1.88) whereas shares of Lowe's possessed a PEG ratio of 1.33 while yielding 1.54% ($0.72).

Home Depot's Dividend Has Grown An Average Of 29.33% Per Year Over The Past Three Years

Since March 8, 2011, the company has increased its quarterly distribution three times over the past 24 months (including the company's most recent increase that was announced on March 11) which translates into an average annual dividend growth rate over that particular period of approximately 29.33%. From an income perspective, the company's forward yield of 2.47% ($1.88) coupled with its 36-month dividend behavior certainly make this particular stock a very viable income option for long-term investors in search of a moderate-yielding home improvement play.

Based on the company's average dividend growth rate over the past three years, I strongly believe we could see a $0.06/share-to-$0.10/share quarterly increase by February 2015 (bringing the quarterly payout to a range of $0.53/share-to-$0.57/share) and an additional $0.08/share-to-$0.12/share increase by February 2016 (bringing the quarterly payout to a range of $0.61/share-to-$0.69/share).

Conclusion

For those of you who may be considering a position in Home Depot, I strongly recommend focusing on two key factors. First, I'd pay close attention to the company's recent trend performance, as its 20-,50-, and 200-day SMAs could improve if both earnings and retail sales (as a whole) begin to demonstrate sustainable uptrends. Secondly, I'd keep an eye on management's ability to continually enhance shareholder value through the enhancement of both the company's dividend (which was just raised 21% on Feb. 25) and its share repurchase program (which is expected to be in the ballpark of $5B during 2014) over the next 12-24 months, as both of these factors could play a role in the company's long-term growth.

Source: A Few Reasons Why I'm Still Attracted To Shares Of Home Depot