While it shouldn't really surprise anybody if there's a little volatility or turbulence along the way, it looks like the long-awaited remodeling upturn is firmly in place now. Not only did Home Depot (NYSE:HD) trounce expectations for same-store sales growth, but companies like American Woodmark (Nasdaq: AMWD), RPM (NYSE:RPM), and Stanley Black & Decker (NYSE:SWK) are seeing improved prospects as well. While these shares didn't do much over the last three months and the valuation is not what I'd call “screaming bargain”, I wouldn't step in front of the momentum with my own money.
 
Another Strong Quarter
I wouldn't call Home Depot's second quarter a blow-out, but it was definitely another strong quarter and further evidence that there is a recovery underway in remodeling and home improvement.
 
Revenue rose more than 9%, with comp-store growth of nearly 11%. That was well ahead of the 7% Street estimate, and the 11.4% growth in U.S. comps was the strongest result in 14 years – particularly impressive given how much larger the company is today. Comp growth was also very well balanced, as the average ticket was up more than 4% and transactions were up about 5%. 
 
While preparing for the eventual recovery in demand, Home Depot has also been exceptionally diligent about improving store-level and supply chain productivity and efficiency. Although this quarter wasn't a banner example of the progress being made (results were very slightly disappointing relative to expectations), gross margin did improve another 13bp and operating income rose more than 17%.

SEE: Home Improvements That Boost Resale Value
 
Credit Can Cut Both Ways
While some commentators have opined that rising mortgage rates threaten the housing recovery, I'm not convinced that's a clear and present danger for Home Depot. While it's true that rates are rising, it's also true that banks are expanding their balance sheets and showing more willingness to lend via credit cards and home equity loans. Given Home Depot's exposure to renovation and remodeling, relative to new home construction, I'd call that a net positive for the company, and likely a net positive for rival Lowe's (NYSE:LOW) as well.
 
Will The Productivity And Efficiency Push Go To Far?
Right now, there's not a lot of fault to find in Home Depot's operations or business plan. Shoppers are coming back to buy more lumber, more appliances, more tools, more paint, and basically more of everything.
 
On the other hand, I'm not sure how much harder Home Depot can push on its suppliers. Although Home Depot is a huge presence in its market, it's not the only sales channel for companies like Stanley Black & Decker, RPM, and other large suppliers. At some point, pushbacks on pricing, inventory management and so on will become counter-productive, and there's a risk (albeit a slim one) that these suppliers turn more to rivals like Lowe's or the online sales channel (including Amazon (Nasdaq:AMZN)).
 
The Bottom Line
As I said in the intro, Home Depot certainly isn't cheap by conventional standards, whether that's discounted cash flow, EV/EBITDA, EV/sales or what have you. On the other hand, the company is clearly seeing good sales momentum and the fact that there's still debate about whether the renovation and remodeling markets are back in recovery mode tells me there's more room to run. I still don't see enough potential in Home Depot to invest my own money in the shares, but I wouldn't tell current shareholders to be in any hurry to sell.
 
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!