Stimulus Checks Lessen Home Depot Pain

"We continue to see pressure on our market and the consumer, generally," CEO Frank Blake said in a statement. "Despite the macroeconomic conditions, we saw improved execution in our merchandising and operations initiatives during the past quarter."

Home Depot maintained its guidance for 2008, saying it expects sales to decline 5% and EPS from continuing operations to drop 24%. The guidance does not include store closure costs.

My bullish thesis on Home Depot is that sales and profit growth will return in 2009, once existing and new-home sales improve.

As well, Home Depot's substantial amount of free cash flow will allow it to buy back a large amount of stock in 2009, once the capital markets improve, which will boost earnings per share. Home Depot remains underleveraged today.

On its conference call, Home Depot pointed to several signs that current fundamentals may be nearing a bottom.

Housing expenditures in the U.S. are now at 3.5% of GDP, below the 60-year historical average of 4.75%, management said. This could be a sign that housing is bottoming, but Home Depot continues to remain cautious for the rest of this year.

Meanwhile, customers continue to spend to maintain their homes, particularly in plumbing and energy-efficient products, Home Depot said.

Two-thirds of the company's markets had better same-store sales performance in the second quarter than the first quarter, obviously helped by the government stimulus checks. (Nonetheless, this shows sequential improvement).

In morning trading, Home Depot shares remained roughly unchanged at $26.87.

This price equates to a forward P/E ratio of 15. Investors looking for the eventual turnaround in Home Depot are getting paid to wait with a 3.3% dividend yield.

Home Depot remains an attractive long-term growth story, and the company (along with Lowe's) will grab market share from smaller mom-and-pop hardware stores that are being ravaged by the credit crunch and weak economy.

Bricks and Mortar Portfolio A Look at How Nicholas Yulico's Picks Have Performed
	Rating Date	Price at Rating	Rating	Current Price*	Total Return**	Year-End '07 Price	2008 YTD Return
Brookfield Properties (BPO)	1/23/2007	28.67	Own	20.26	-29.3%	19.25	5.2%
Global Real Estate ETF (RWX)	1/23/2007	64.00	Own	43.78	-31.6%	56.95	-23.1%
Ryland (RYL)	1/23/2007	56.00	Flag	19.94	64.4%	27.41	27.3%
Penn National (PENN)	2/6/2007	45.56	Own	32.53	-28.6%	59.55	-45.4%
Melco Crown (MPEL)	3/12/2007	15.46	Own	7.30	-52.8%	11.56	-36.9%
Starwood Hotels (HOT)	7/12/2007	72.37	Own	39.01	-46.1%	44.03	-11.4%
Home Depot (HD)	1/30/2008	29.71	Own	26.96	-9.3%		-9.3%
Pulte Homes	1/31/2008	16.35	Flag	12.53	23.4%		23.4%
Boyd Gaming (BYD)	6/27/2008	12.72	Own	11.73	-7.8%		-7.8%
Perini Corp. (PCR)	6/27/2008	33.42	Flag	28.60	14.4%		14.4%
Average Total Portfolio Return, Unweighted, (including closed ratings)					10.7%		-1.0%
Closed Ratings	Rating Date	Price at Rating	Rating	Closing Price***	Return**
Hilton (HLT)	3/2/2007	34.69	Own	47.50	36.9%
Home Solutions of America (HSOA)	4/24/2007	4.98	Flag	1.06	78.7%
Standard Pacific (SPF)	10/26/2007	5.25	Flag	2.20	58.1%	3.35	34.3%
Trump (TRMP)	1/23/2007	17.50	Flag	3.56	79.7%	4.30	17.2%
	Close At Start of Portfolio			Current Value*
S&P 500	1427.99			1,278.60	-10.5%	1468.36	-12.9%
U.S. MSCI REIT Index	1140.36			855.43	-25.0%	870.64	-1.7%
*(8/18/08 closing prices) **For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative. ***Hilton closed out of portfolio on 10/26/07 because Blackstone Group completed purchase of firm. HSOA closed out of portfolio on 12/26/07 at day's closing price SPF closed out of portfolio on 1/11/08 at day's closing price TRMP closed out of portfolio on 5/29/08 at day's closing price