USHS U.S. Home Systems, Inc. (MM)

Shares of Home Depot Inc. (HD) set a new 52-week high of $60.58 on Tuesday, September 25, 2012, beating its previous 52-week high of $60. The closing price of this home improvement retailer as of September 25, 2012 was $59.72, which represented a solid year-to-date return of41.7%. Average volume of shares traded over the last 3 months stands at approximately 8,720 thousand.

Growth Driver

An impressive record of beating the quarterly earnings expectations, robust top-line growth, upside in comparable store sales year-to-date, a raised fiscal 2012 outlook, a decent dividend yield, and acquisitions to enhance customer relations, – are the major contributors of growth for the shares of this company.

With respect to earnings surprise, Home Depot has topped the Zacks Consensus Estimates in three of the last four quarters, and met the estimates in one, with an average of 8.3%.

Home Depot witnessed sales growth of 5.9% in the first quarter of 2012 compared with the prior–year quarter, driven by comparable sales growth of 5.8%. In the second quarter of fiscal 2012, sales grew at the rate of 1.7% compared with the prior-year quarter, which was driven by comps growth of 2.1%. U.S. comps augmented 6.1% and 2.6% in the first quarter and second quarter of fiscal 2012, respectively.

Following the strong quarterly results, management raised its fiscal 2012 earnings guidance to $2.95 per share, escalating 19% from last year’s $2.47 and up from the earlier forecast of $2.90.

Home Depot rewards its shareholders through regular quarterly dividends and share repurchases. Recently, the company announced a quarterly dividend of 29 cents per share. This yields a solid 1.9%, while the company has a payout ratio of 40%.

In the previous quarter, the company bought back nearly 23.6 million shares, valued at approximately $1.5 billion. Through the rest of the fiscal year, the company intends to repurchase shares worth $1.4 billion.

On August 7, 2012, Home Depot announced a merger deal with a Texas based company, U.S. Home Systems Inc. (USHS) for a cash deal of $12.50 per share. Management believes that the merger will help to build a better relationship with the customers by providing them improved home services.

Earnings Estimate Revision

The Zacks Consensus Estimate for 2012 increased 1.7% to $2.95 per share over the last 60 days. The current year-over-year growth estimate for 2012 is 19.4%.

For 2013, the Zacks Consensus Estimate was raised by 1.5% to $3.36 per share over the same time frame. The current year-over-year growth estimate for 2013 is 13.9%.

Valuation

Valuation looks reasonable for Home Depot, with shares trading at 20.24x 12-month forward P/E, at par with its peer group average. However, on a price-to-book basis, shares are currently trading at 5.18x, a 37.4% premium to the peer group average of 3.77x.

Nevertheless, the stock looks attractive given a trailing 12-month ROE of 23.8%, which is higher than the peer group average of 13.3%. The company’s long-term estimated earnings per share growth rate also remain strong at 13.7%.

About the Company

Based in Atlanta, Georgia, Home Depot is the world’s largest home improvement specialty retailer with 2,250 retail stores across the globe, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. The company has a market capitalization of $90.02 billion.

Zacks Rank & Recommendation

Based on the above analysis, Home Depot currently carries a Zacks #2 Rank, which translates into a short-term Buy rating for the next 1-3 months. However, we maintain our long-term ‘Neutral’ recommendation on the stock.

 
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