Home Depot (HD) reported second quarter earnings on Aug. 20, beating analysts’ earnings per share estimate by $0.03 at $1.24. Revenue grew 9.5% from second quarter 2012 to $22.5 billion. Operating income was up 17.5% to $3.0 billion. Net income ended the quarter at $1.8 billion, 17.2% above second quarter 2012. Earnings per share were 22.8% higher than second quarter 2012.
Total comparable store sales were up 10.7% and U.S. comparable store sales were up 11.4% showing positive results from the MyInstall and Pro business initiatives. Second quarter selected highlights for Home Depot further demonstrated the company’s positive sales growth. In comparison to second quarter 2012, customer transactions for the quarter were up 4.9%, average ticket sales were up 4.3% and weighted average weekly sales per store were up 9.1%.
Housing continued to drive revenue growth which specifically showed in appliance sales. In the second quarter, appliances helped lead big ticket transactions, which increased by 15.5%. Appliances also had double digit comparable sales growth and contributed significantly to the quarter’s revenue outperformance. The trend in appliance sales is expected to continue for Home Depot as appliance inventory is added to more stores in the second half of the year.
In addition to the better than expected results, Home Depot also increased its full year guidance for 2013. Management increased its revenue growth expectation from 2.8% to 4.5%. The company also increased its fiscal year earnings per share guidance from $3.52 to $3.60.
While product initiatives and supply chain management have helped Home Depot grow revenue, improvements in the housing market continue to be a leading catalyst for the company. The Commerce Department’s most recent housing construction report showed housing construction continuing to trend up in July. The July New Residential Construction report stated annual gains of 12.4% in building permits, 20.9% in housing starts and 15.0% in housing completions.
In second quarter 2013 earnings comments, management also pointed to private fixed residential investment (PFRI), a component of gross domestic product (GDP), and housing affordability as key metrics showing improvement in the housing market. In the second quarter PFRI increased steadily. In the first quarter of 2013 the National Association of Realtors’ Housing Affordability Index reached a record high of 203. Management expects these metrics to continue to improve despite some concern over the Federal Reserve’s tapering strategy for quantitative easing, which has pushed mortgage rates higher over the past few months.
The housing market recovery’s positive effects on Home Depot’s earnings have helped it to outperform the Dow Jones Industrial average on a one-year basis gaining 32.57% versus 13.07%. In the broader market, Home Depot has also outpaced housing index funds S&P Homebuilders Select Industry Index (SPSIHO) and iShares Dow Jones U.S. Home Construction ETF (ITB). For the one-year period Home Depot outperformed these funds 11.38% and 17.82%, respectively.
Based on a one-year forward looking valuation projection for the company it appears to have a price target1 of $80.15. At its current price of $74.29 it is slightly undervalued, making it a leading stock investment for investors seeking to gain from the housing market’s continued recovery.
1 The price target is derived from Bodie, Kane and Marcus’ intrinsic value formula. The intrinsic value formula discounts the stock’s projected one-year future cash flow by the risk-free rate on the one-year Treasury note and includes adjustments made for specific market assumptions including the stock’s beta and market risk premium.
Disclosure: No holdings.
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