Market Overview

Home Depot Delivers Again

The Home Depot, Inc. (NYSE: HD) reported third quarter earnings this morning, that were better than expected, and the company increased its dividend. Despite the better than expected report and increase, shares are down slightly as of the time of this article.

The Atlanta, GA-based company reported third quarter earnings of 60 cents per share on $17.33 billion in revenues. Wall Street was looking for earnings of 58 cents per share. The company also increased its quarterly dividend, going from 25 cents per share per quarter to 29 cents.

"Our third quarter was driven by strength in our core categories and storm-related sales as well as strong operating performance," said Frank Blake , chairman & CEO. "We will continue to invest in our core initiatives to provide customers with exceptional customer service and great product values. I would like to thank our associates for their hard work and dedication."

For a nearly $60 billion company to grow earnings 12% is impressive, especially in the worst housing market in years. The growth was helped not only by Hurricane Irene, but by the fact that consumers are spending more on improving their homes, as opposed to getting new ones.

Many have said that we will not see a rebound in the housing market until at least 2013, and that is benefiting Home Depot, and to a much lesser extent, Lowe's Cos. (NYSE: LOW).

On the conference call, CEO Blake said, "In the U.S., we still do not see, and do not expect to see in the near term, any meaningful tailwind from the housing market."

The company is reinventing itself, and catering to the online shopper, with a program where you are able to buy the product online and pick it up in the store, instead of having to search around the giant warehouse stores for a particular product. This fact did not get past Oppenheimer and Morgan Stanley, as the two research firms made sure to note that Home Depot is catering more towards the consumer.

In Oppenheimer's research note, it wrote, "Over the past few years HD has worked aggressively to enhance the structural underpinnings of its enterprise and position the chain to perform well even with macro conditions uncooperative.”

Morgan Stanley was a little bleaker in its note, but did make sure to note it believes "HD remains a “self-help” story, as the company should continue to gain share and maintain cost control due to its operational and supply chain improvements.”

Frank Blake has done a terrific job of transforming the company's image to one that caters to everyone, as opposed to just contractors. Associates have become friendlier, and that is showing up in same-store-sales growth, and the continued market share growth against Lowe's. It's part of the reason why shares are up almost 9% year to date, as opposed to a loss of almost 8% for Lowe's.

Home Depot is not "where low prices are just the beginning" anymore. It's where shareholder value is created as well.

ACTION ITEMS:

Bullish:
Traders who believe that Home Depot will continue to take away market share in home improvement might want to consider the following trades:

  • Home Depot is not cheap, trading at 17 times earnings, but it could be given an additional premium to Lowe's should it steal even more market share away.

Bearish:
Traders who believe that the housing market does not ever come back may consider alternate positions:

  • There is a bit of hope built into housing names that the market eventually comes back. When that is, is anybody's guess. It may never happen, and as analysts realize this, earnings estimates could be taken down slightly.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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