New York, October 12--Shares of Home Depot Inc. may extend gains amid solid expected growth in sales of homes and home improvement products, according to the latest edition of Barron's, the weekly financial newspaper.
Though the price of Home Depot's stock has nearly doubled since late January 2003, it has fallen more than 40 percent from its April 2000 high of $70.
Barron's said shares of Atlanta-based Home Depot recently traded at just 15.6 times the company's expected fiscal 2006 profit, a 9 percent discount to the Standard & Poor's 500 stock index. In contrast, shares of rival Lowe's Cos. traded at 16.4 times expected fiscal 2005 profit, Barron's said.
Home Depot shares closed on Friday at $39.02, down 27 cents, on the New York Stock Exchange. The stock of Lowe's Cos., based in Mooresville, North Carolina, ended Friday's session at $54.20, down 44 cents, on the NYSE.
Barron's said a price/earnings ratio of 20 times earnings, implying a stock price of 50, seems reasonable for a company that returns more than 20 percent on invested capital and has a cash-heavy balance sheet.
Home Depot rolled out its first store in Manhattan last month. It has 1,788 stores overall. Chief Executive Robert Nardelli is emphasizing strategic expansion, with hopes to open more than 200 stores per year. He is also emphasizing new higher-end products, improved customer service and more reliance on information technology, Barron's said.
The company's success is in part dependent on continued low interest rates, which help to promote home buying.
But the newspaper said worries that the 5.72 percent rate on 30-year fixed-rate mortgages might spike higher seem overblown and premature, with many economists predicting low- to mid-single-digit growth for the year in sales of existing homes.
In addition, sales of residential home improvement products might rise 25 percent to $452 billion by 2008, Barron's said, citing the Home Improvement Research Institute, an industry trade group. Home Depot accounts for 18 percent of this market, more than twice the amount of Lowe's, which has about 1,000 stores.
Analysts polled by Reuters Estimates on average expect Home Depot to post per-share profit of $2.21 in fiscal 2005, which ends in January, and $2.53 in fiscal 2006.
