Home Depot Cautious On The Housing Market Despite Strong Results

Home Depot (NYSE:HD) continued to beat analyst estimates last quarter with its bumper holiday sales, but the company remains cautious on the overall home improvement retail market recovery despite some signs of improving sentiment. It noted some steady recovery in the hardest hit housing markets, particularly in Florida and California. However, anticipating no near-term policy trigger in the housing sector, its business outlook for 2012 relies on further strengthening of basic maintenance, repair and remodeling needs of its 130 million aging homes customer base. Home Depot’s strongest competitor Lowe’s (NYSE:LOW) will soon announce its earnings and provide its take on the overall trends in the home improvement retail sector and future business outlook.

Our complete analysis for Home Depot’s stock

Uncertainty In The Housing Market

Home Depot’s CEO Francis Blake noted continued uncertainty in the housing market during the recent earnings call. Even though Private Residential Fixed Investments (PRFI) improved by 2.3% last quarter, PRFI as a percent of GDP continues to remain at a 60-year low. The Fed recently pointed towards the imbalance between housing demand and supply due to tight credit supply and delayed construction. However, Home Depot does not anticipate any near-term policy initiatives to address the housing slump. Nonetheless, the company did report a steady recovery in the hardest hit housing markets last quarter, particularly in Florida and California.

The recent signs of stabilizing housing market and improvements in private residential fixed investments have provided upside to the business outlook of home improvement retailers like Home Depot and Lowe’s. Home Depot’s stock price has gained more than 20% over the last three months and robust earnings last quarter with the improved housing sentiment have helped to lift sentiment for the stock.

Focus On Maintenance-Repair and Remodeling Segments

With pre-mature recovery in the overall housing and home improvement market, Home Depot plans to continue to strengthen its maintenance-repair and remodeling categories. In these segments, the home improvement retailer estimates over 130 million aging homes as its potential customer base. It largely expects its growth to follow or modestly lead U.S’s overall G.D.P growth in 2012.

We are in the process of revising our Trefis price estimate of $40 for Home Depot’s stock.

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