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Investment Opportunities

Investing in Home Depot (NYSE: HD)

Tuesday on CNBC’s “Closing Bell”, Maria Bartiromo had a little Q&A with Senior Equity Research Analyst Alan Rifkin of Barclays Capital and Homebuilder Analyst Buck Horne of Raymond James called “Taking Stock in Housing.”

As you can expect, it wasn’t the cheeriest of conversations…

There was the usual talk of too many foreclosures in the pipeline, a glut of vacant homes on the market, Baby Boomers downsizing and the inability of younger generations to come up with the means in order to buy a home in this new housing/mortgage environment due to strict credit and capital guidelines.

But as a good moderator should, Bartiromo pressed the issue for hidden gems – or whether there was anything in the sector that deserved our investment attention. On the homebuilder front, there’s a phenomenon called the “Hope Trade,” where annually from the middle of November to Super Bowl Sunday there’s an uptick with major homebuilders.

However, those industry fundamentals are absolutely horrible after the NFL football season and in the foreseeable future.

A Gem in a Rough Market

What was more interesting is the current trend to fix what you got because you can’t trade up. And this is where Home Depot (NYSE: HD) comes in. We need to look at how they boosted profitability in a bad housing market.

According to an interview with Home Depot Chief Financial Officer Carol Tome, consumers continue to spend money to maintain their homes, lifting same-store sales of transactions over $900 by 3.6 percent, including increases in more discretionary categories such as kitchen cabinets.

“We see the core repair projects remain strong,” Tome said. “We do see some movement in big-ticket items.”

A Strong Third Quarter

Two weeks ago, when the Atlanta-based company announced its third-quarter numbers, it raised its full-year earnings outlook to $2.38 a share from $2.34 a share and increased its dividend by 16 percent to $0.29 a share. Dividend increases are good right now.

Last quarter’s net income rose to $934 million, or $0.60 a share, from $834 million, or 51 cents, a year earlier. Sales rose 4.4 percent to $17.3 billion. Comparable-store sales rose 4.2 percent, including a 3.8-percent increase in the United States.

Analysts, on average, had estimated Home Depot would earn $0.59 cents a share on sales of $17.1 billion, according to FactSet. Same-store sales topped the 2.9 percent gain analysts surveyed by Retail Metrics expected.

Tome went on to say later in that same interview, “We are gaining share,” adding that there are still pockets of “extraordinary housing weakness” in the west. “Our growth is tied to the general economic growth. We grew faster than GDP. A lot of it is because we are taking share.”

Going forward, why like Home Depot?

Here are two major reasons:

  • Last week, Fitch upgraded its rating on Home Depot to an A- due to its solid operating momentum, strong free cash flow and public commitment that it’ll maintain its current financial leverage.
  • Home Depot’s 3Q results left its smaller archrival Lowe’s (NYSE: LOW) in the dust. Lowes reported a 44-percent drop in third-quarter profit with a 0.7-percent same-store-sales increase and there is fear its fourth-quarter outlook may fall short of analysts’ estimates.

A three-percent dividend yield doesn’t hurt, either. It may be smart to keep an eye on “The Depot.”

Good Investing,

Jason Jenkins

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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