The Home Depot, Inc. (HD): A Different Way to Play Housing

Investors are clamoring for new ways to invest in an emerging bull market in American real estate. Some favorite investments include the likes of The Home Depot, Inc. (NYSE:HD), which is known for robust capital allocation, dividends, and share repurchases.

The Home Depot, Inc. (NYSE:HD) recently announced earnings that beat on the top and bottom line. The company reported earnings 18% higher than the year-ago period from tremendous improvements in same-store sales. Revenue at comparable stores (those open for at least one year) swelled by 4.3%, confirming Home Depot’s promise that the company would see top-line expansion and the possibility for impressive margin expansion.

As strong as the reports were, The Home Depot, Inc. (NYSE:HD) shares failed to pop. The company saw shares rise just under 4%, or $3, as shares traded from $77 to just under $80 per share.

The lackluster performance of the stock after an earnings beat and improved forecast shows that going directly into housing via home-improvement retailers may be a mistake for the speculative investor. The Home Depot, Inc. (NYSE:HD) is a cash cow in up and down cycles, making it just as much defensive as it is cyclical.

Where to go for home exposure

Investors who want to play a rise in American home values may want to look away from homebuilders – which have risen substantially already this year – to automakers.

Automakers? Yes, automakers!

In what seems like the most roundabout way to grab a position on American housing, automakers derive a majority of their domestic automotive profits from the sale of trucks. Trucks, believe it or not, sell fastest when the housing market is booming. Contractors and construction companies typically update or add on to their trucking fleets when the market turns stronger.

That trend is starting to show in the bottom line for American automotive companies.

Here’s why: the average car on American roads is 10 years old. American automakers cut capacity during the financial crisis, and margins have improved across the board. There is already ample, pent-up demand for American cars for personal transportation.

On top of this pent-up demand is very valuable truck demand. Trucks are worth as much as $10,000 in profit per unit. That’s serious upside for automakers, which earn, on their best day, $1,000 from the sale of a compact car or sedan. Contractors and construction crews update their very expensive, very profitable trucks when capacity requires expansion ahead of a boom in construction. Home construction is at a tipping point – one analyst believes national home sales will not pick up until new home construction helps alleviate some of the supply constraints in houses available for sale.