Seeking Alpha
Long/short equity
Profile| Send Message| ()  

Home Depot (HD) reported strong second quarter 2012 sales in its earnings call on August 14. The company grew net sales 1.67 percent from the previous year and 15.51 percent for the quarter.

Net income increased 12 percent on an annual basis, improving from $1.4 billion in 2Q11 to $1.5 billion in 2Q12. On a quarterly basis, net income was up 48 percent from $1.04 billion in the previous quarter.

Diluted earnings per share exceeded 2Q12 estimates and ended the quarter at $1.02, up from $0.68 in the previous quarter and $0.87 one year ago. Given the company's year-to-date growth, it maintained sales projections for fiscal year 2012; estimating an increase for the year of 4.6 percent. Additionally, the company increased its fiscal year diluted earnings per share estimate by 19 percent to $2.95.

Residential construction industry growth in the consumer discretionary sector helped to drive Home Depot's second quarter sales. Housing starts have been key to the improvements occurring in the construction industry. According to seasonally adjusted quarterly averages reported by Freddie Mac, housing starts increased 2.8 percent on an annual basis in the second quarter of 2012, which contributed to profits for residential builders and retail affiliates. Housing starts are expected to continue improving through 2012 with an estimated increase of 5.41 percent in the second half of 2012 and 25.64 percent in 2013, according to Freddie Mac.

The growth in housing starts has greatly contributed to profits and stock returns for Home Depot which provides home specialty products specifically targeted for residential builders and designers. Year-to-date Home Depot's stock has outperformed Lowe's (LOW), its closest competitor in the home improvement industry, by 20.68 percent. One-, three- and five-year total returns have also led the industry group at 76.39, 26.35 and 10.34 percent, respectively.

PulteGroup Inc. (PHM), Lennar Corporation (LEN) and D.R. Horton Inc. (DHI) have also been contributing to total return in the consumer discretionary sector year-to-date due to the improved outlook on residential housing starts. PulteGroup has led the sector's performance, reporting a total return of 97.15 percent. Additional supporting total return data for the consumer discretionary sector can be found below in Table 1.

Due to the growth occurring in housing starts, residential construction companies and affiliated retail investments continue to provide capital appreciation in the current environment despite macroeconomic headwinds. The growth in housing starts, as well as Home Depot's second quarter earnings results and optimistic future outlook for the second half of its fiscal year make it a leading investment in the consumer discretionary sector, particularly for investors bullish on residential construction in the real estate market.

(click to enlarge)

Source: Home Depot Continues To Lead In The Consumer Discretionary Sector