Profiting with the do-it-yourselfers
The Home Depot, Inc. (NYSE:HD) is perfectly positioned to take advantage of both new and existing home remodels by consumers, as well as those of commercial entities. Although the recent U.S. job market report was somewhat disappointing, Home Depot shares continue to soar.
This could be due in large part to the rising housing market, as an upswing in housing typically equates to a strengthening home improvement arena as well. Psychology may also play a part in this, as consumers are realizing that investing in an appreciating asset, versus a depreciating one, is much more preferable.
The Home Depot, Inc. (NYSE:HD)’s rising share price may also have something to do with the private equity owners of the company filing for an IPO. HD Supply is Home Depot’s former contracting, construction, and industrial supplies distribution division that was sold to private equity Carlyle Group LP (NASDAQ:CG) back in 2007. This entity saw a 14% rise in growth in 2012, bringing in approximately $8 billion in revenue.
Being a key player in the somewhat fragmented home improvement sector, Home Depot has, admittedly, been revamping itself with a concentration on square footage growth of its stores, along with maximizing productivity from the company’s existing store base.
The actual operation of the company’s stores has also become much more user friendly. This, too, should help to bring in more customer traffic, in turn helping to increase the stores’ bottom line revenue and net profits. In addition to its vast product offerings, Home Depot attributes its success to its skilled employees, as well as technological advancements.
Company shareholders of The Home Depot, Inc. (NYSE:HD) have been long rewarded. In fact, over the past 26 years, Home Depot has raised its stock dividend from $0.06 per share to $0.39. In addition, Home Depot plans to grow its return on invested capital to 24% over the next three years.
Other big box options
Given the impressive record of The Home Depot, Inc. (NYSE:HD) in the big box home improvement world, Lowe’s Companies, Inc. (NYSE:LOW) actually lags as a distant second, although the company’s share price is still up more than 5% year-to-date. On the dividend side, though, shares of this company are not likely a good candidate for income, with its somewhat low dividend yield of 1.7%.
In light of the recent upswing in the housing sector, though, Lowe’s has plans to expand its work force to the tune of adding roughly 9,000 additional permanent part-time jobs. This is good news for the company, and given Lowe’s solid stock performance and notable return on equity, the shares are rated as a “buy” by a number of analysts. With this in mind, Lowe’s Companies, Inc. (NYSE:LOW) shares could turn out to be a good growth play over the long haul.
Other big box retailers don’t quite have the same positive sentiment as The Home Depot, Inc. (NYSE:HD) or Lowe’s. Take, for example, Office Depot Inc (NYSE:ODP). This struggling office products and services provider has lagged, primarily in its service areas such as printing and reproduction, as consumers are becoming increasingly more adept at handling these duties themselves.
One catalyst that could move this company’s prospects, and shares, higher is the proposed merger between it and competitor OfficeMax Inc (NYSE:OMX). At the closing of the merger, OfficeMax Inc (NYSE:OMX) shareholders are expected to receive almost 2.7 shares of the new Office Depot for every single share they hold.
Analysts expect significant synergies as a result of this merger, which could help both companies return to a much healthier position. In recent years, Office Depot Inc (NYSE:ODP)’s management has done a good job of streamlining the company’s core operations by cutting overlapping costs in many segments. This has helped the company in achieving higher EBIT margin trends. Adding cost savings and synergies resulting from the merger with OfficeMax Inc (NYSE:OMX), I believe this trend should improve further.
The recent announcement of the intended merger helped to, at least initially, raise the company’s share price. Since then, though, shares have dropped by roughly 25%. Should the FTC approve the merger, now may be a great opportunity to pick up highly discounted Office Depot Inc (NYSE:ODP) shares.
Just as with The Home Depot, Inc. (NYSE:HD), the economic factors of the past several years have caused the shares of Lowe’s and Office Depot to bounce back and forth like a proverbial ping pong ball. With this in mind, though, and as the economy re-emerges, solid sales and revenue should help to boost Home Depot’s share price value.
In addition, should the housing market continue on its upward glide, the prospects for rising dividends is also a good possibility. This could help to smooth investors’ ride should there be more market-related bumps along the road.
The bottom line
While Home Depot has an impressive record of beating quarterly earnings estimates, it projects its fiscal earnings for 2013 to grow by almost 12%, with comparable store sales expected to grow by almost 3%. This could pay off nicely for investors in terms of share price increase, along with a steady round of income while they wait.
The article Is The Home Improvement Market Still Building Value For Investors? originally appeared on Fool.com and is written by Nauman Aly.
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