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Using a Value Line Report: What Upswing in Housing Market Means for Home Depot
Headlines about the U.S. housing market recovery have put Dow-30 component The Home Depot (HD - Free Home Depot Stock Report) on investors’ radar screens in recent months. And with good reason. Just by looking at the Graph (in the mid-section of the Value Line report), we clearly see that the stock’s price has more than doubled since mid-2011.
No doubt, this blue chip stumbled during the 2007-2009 recession, as the housing bubble burst and the financial crisis peaked. But the building supply/home improvement chain managed to regain its footing by 2010, with annual sales and profits rebounding nicely and even showing growth more recently, as evidenced in the Statistical Array (found in the middle of the page). Indeed, while the housing market remained fairly dormant after the recession ended, homeowners seemingly took that as an opportunity to spruce up their living spaces and tackle home-improvement projects. Repair and rebuilding efforts in the aftermath of Hurricane Sandy, in the meantime, have driven business for Home Depot of late.
And with more good news streaming in on the housing front, it is no surprise that investor interest in HD shares has continued to perk up. Granted, the housing market is not out of the woods just yet, as monthly figures are still relatively uneven. Admittedly, too, the somewhat weak job market adds a challenging element to the mix. But the general trend in the housing sector seems to indicate that things are moving in a positive direction, which is a welcome sign.
So far, in the initial part of 2013, major indicators have pointed to an upswing in home building and selling activity, albeit at an unassuming pace on a month-to-month basis; year-over-year comparisons have been significantly better, however. For example, housing starts—an important forward-looking metric—edged higher recently. Building permits, which are a more predictive measure, stepped back sequentially, but nonetheless, were up sharply from year-earlier tallies. And, like permits, new and existing home sales have moved in similar fashion, fluctuating on a sequential basis, but showing a clear rebound from the prior-year levels.
Given that the housing market is one of the key contributors to the nation’s economic growth, the latest data are encouraging. In fact, improving housing market fundamentals suggest an upbeat near-term outlook for Home Depot. With all of this in mind, notice that HD stock gets a 2 (Above Average) for Timeliness (as shown in the Ranks box at the top left-hand corner of the page). As a reminder, this gauges an equity’s price and earnings momentum compared to the performance of the broader market, and it ranges from 1 (Highest) to 5 (Lowest). HD’s favorable Timeliness rank, therefore, reflects the chain’s good earnings results of late, coupled with positive near-term prospects that coincide with a recovering housing market.
Much of this is echoed by covering analyst Matthew E. Spencer in the Commentary section of the page. As he discusses in the writeup, Home Depot’s recent performance was helped by the continued recovery in the housing market, alongside repair and rebuilding efforts in the wake of Hurricane Sandy. He further points out that profit increases expected for 2013 and 2014 should be driven by the rebound in the housing and labor markets.
Besides its Timeliness rank, Home Depot stock has other striking features, including its top-notch Safety rank of 1. This measure (located in the Ranks box) implies HD shares have considerably less risk, and thus, are safer than the average issue under Value Line’s review. Like Timeliness, the rank ranges from 1 (Highest) to 5 (Lowest). Also in the same section, the Beta coefficient shows that the stock’s volatility is just below that of the market (where 1.00 = the market). (Note that a figure lower than 1.00 means the equity is less volatile, while a number that is higher indicates greater volatility than the overall market.)
Glancing down at the bottom of the page, in the Ratings box in the lower right-hand corner, we see other elements that further highlight the company’s solid risk profile. What stands out in particular is the company’s exemplary score for Financial Strength (A++), which takes into account a range of items, such as cash and debt levels. And while not at the top of the range, HD gets solid marks for Stock Price Stability (85 out of 100) and Earnings Predictability (80 out of 100).
Meanwhile, although the issue does not offer much in the way of long-term growth potential, as illustrated by the 3- to 5-year price-gain and total return forecasts (in the Projections box), there is still some income to be made here. The dividend yield (found in the Top Label) is not bad at 2.3%, giving the stock added appeal.
All told, investors looking for a good play on the housing market turnaround, with a low-risk profile, would be wise to consider Home Depot shares. As analyst Matthew Spencer concludes, the blue chip remains on Value Line’s recommended list for year-ahead price performance, not to mention that the stock is a fine choice for conservative accounts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.