The Home Depot, Inc. (HD): Can This Home Improvement Retailer Improve Your Portfolio?

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The Home Depot, Inc. (NYSE:HD)is the biggest home improvement chain in the country, and has returned 20% gains to investors just to start 2013, including dividends. In addition, rising home sales and consumer confidence are playing into the thesis that Home Depot’s business is thriving.

After such strong performance, both in terms of the company’s underlying results as well as its stock price, should investors jump on the Home Depot bandwagon?

The Home Depot, Inc. (NYSE:HD)

U.S. housing showing signs of life

The housing market continues to improve, as evidenced by a variety of housing-related data points, which can only mean good things to come for The Home Depot, Inc. (NYSE:HD). According to the Standard & Poor’s Case-Schiller housing index, home prices rose 1.1% in March. This exceeded expectations and represented the biggest annual gain in nearly seven years.

Furthermore, existing home sales increased 4% in May, reaching the highest level since November 2009, according to the National Association of Realtors.

It stands to reason that as the housing market improves and consumers feel better about their homes and their personal finances, spending on housing should increase.

Industry-leading performance

These industry tailwinds are already being felt in Home Depot’s underlying results. Last year was a terrific one for the company. Earnings per diluted share in fiscal 2012 were $3, compared to $2.47 per diluted share in fiscal 2011, an increase of 21.5% year over year. These results reflect a nonrecurring charge of $0.10 per diluted share. On an adjusted basis, earnings per diluted share in fiscal 2012 were $3.10, representing an increase of 25.5% versus the prior year.

In addition, The Home Depot, Inc. (NYSE:HD)’s success has continued to start 2013. The retailer’s first-quarter same-store sales, which include only those locations open at least one year, increased 4.3% year over year. Meanwhile, diluted earnings per share soared 22% from the same period one year ago.

Unfortunately, not all home improvement chains are created equal. Close peer Lowe's Companies, Inc. (NYSE:LOW) has not seen great results in recent quarters.

First, the company reported diluted earnings per share for the fourth quarter and full fiscal year of $.26 and $1.69, respectively. Full-year sales inched up less than 1% versus 2011. Then, Lowe’s provided a disappointing first-quarter report that revealed its sales fell 0.5% from the same period one year ago.

Furthermore, while the company’s first-quarter earnings per share rose 14% year over year, the results missed analyst expectations.

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