Home Depot Results Expected To Benefit From Housing Recovery And Hurricane Sandy

Home Depot (NYSE:HD) is scheduled to release its Q1 earnings results on May 21. The company is expected to continue benefiting from a housing market recovery as well as continued reconstruction activity after Hurricane Sandy. The positive sentiment is reflected in the company’s strong stock performance in recent months due to encouraging report on key housing metrics such as record levels of home construction, declining vacancies, lower mortgage default rates and rising home prices.

Home Depot certainly seems to have leveraged the increased demand for homes and home-related products well. Its total sales were up about 6.2% year-over-year in 2012. Meanwhile, the company has also done well to complement top-line growth with key cost reduction strategies, boosting the bottom-line. In short, investors have a good reason to look forward to strong results when the company reports its first quarter results on Tuesday.

Our complete analysis for Home Depot’s stock

Housing Recovery Remains Strong, Hurricane Sandy To Further Boost Sales

The housing market recovery continued in the first quarter of 2013, spurred by strong consumer confidence and mortgage rates at near record lows. New home sales rose well above 400,000 per month in the first three months of the year. Sales of existing homes continued to be strong as well during this period. The National Association of Realtors is slated to report existing home sales data for April on Wednesday, which may provide further boost to Home Depot’s stock price. The reason that sales of new as well as existing homes benefit Home Depot is the spending on home improvement by new occupants. ^[1]

Meanwhile, sales related to household repairs following the damage caused by Hurricane Sandy should also factor in to solid first quarter results, further boosting the top-line. Although a majority of the repair work commenced towards the end of 2012, the sales effect of Sandy will most likely be spread throughout 2013. ^[2]

The Federal Emergency Management Agency has approved $1.38 billion in assistance for Sandy victims, which will result in an uptick in demand for lumber for those areas affected. As the nation’s largest home improvement chain, Home Depot is poised to capture a good chunk of the spending. The New Jersey area was one of the worst affected by Sandy and also one of the the best performing regions for Home Depot in the fourth quarter. The company opened a 10,000 square feet satellite store this quarter in New Jersey to serve the needs of residents here. ^[3]

Margins To Remain Strong With Cost Reduction Programs Leading The Way

Home Depot’s earnings in 2012 received a strong boost by the company’s focus on reducing costs, including efforts to reduce complexity in the supply chain, improve distribution, and localize marketing and merchandising activities. Operating income as a percent of net sales was 10.4% for fiscal 2012 compared to 9.5% for fiscal 2011. This is largely a result of reduced selling, general and administrative expenses (SG&A), which fell from 22.8% of total revenues in 2011 to 22.1% of total revenues in 2012. Operating margins are expected to continue strengthening throughout 2013. ^[4]

We have a Trefis price estimate of $65 for Home Depot’s stock, which we will revise once the company’s first quarter results are out.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Home Sales Data, National Association Of Home Builders [↩]
2. WEEK AHEAD: Home Depot, Lowe’s, Best Buy, Housing Data in Spotlight, Fox Business [↩]
3. Sandy’s Effects Likely to Bolster Home Depot, Lowe’s, WSJ [↩]
4. Home Depot 2012 10-K, SEC [↩]