To conclude, we are in the third year of the worst housing crisis investors have seen in the post-WWII era, and the home improvement retailers have caught the full brunt of the housing downturn as new and existing home sales have slowed and price declines within the existing housing stocks have dis-incentivized homeowners to maintain property. Once home prices start to stabilize and improve -- some think this doesn't happen until early 2010 -- then the home improvement retailers will likely feel the improvement first as existing homeowners will schedule previously deferred remodeling to further improve home values.
Home Depot is currently trading at 12x and 13x 2008 and 2009 earnings estimates, and 0.60 12-month trailing revenue, with a 4.5% dividend yield. At $20 per share, Home Depot is also trading at 7x enterprise value to 12-month trailing cash flow, with a 2% free cash flow yield, so the valuation is certainly getting close to a compelling buy, but the falling earnings estimates continue to delay our investment decision. Some type of legislative or stimulus package relief for homeowners could help the housing story, but we would prefer to wait until forward earnings and revenue estimates stop falling.
Know What You Own: Home Depot and Lowe's operate in the home improvement store industry, and some of the other stocks in their field include Lumber Liquidators (LL - commentary - Cramer's Take) and Builders FirstSource (BLDR - commentary - Cramer's Take). Toll Brothers operates in the residential construction industry, and some of the other stocks in its field include Pulte Homes (PHM - commentary - Cramer's Take) and NVR Incorporated (NVR - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.
P.S. Will you be there when Cramer makes his next move?
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Retail TGT Preview: Piling On? 11/14/2008 4:15 PM EST Analysts expect the company to report 49 cents of EPS on $15.2 billion in sales.
Retail ANF Guides Down 11/14/2008 1:58 PM EST Guidance was for EPS of $1.00 to $1.05 for the current quarter vs. a $1.72 consensus.
Retail JWN Is No Exception to the Retail Pain 11/14/2008 10:34 AM EST The guidance for the holiday shopping quarter is being reduced by 50% from current consensus.
At the time of publication, Gilmartin had no positions in the stocks mentioned, although positions may change at any time.Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.
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