Updated to include CEO comments
Although Wall Street has sent Home Depot's (HD) stock down 7% in the past three months amid slowing sales trends in the U.S. housing market, investors may have underestimated how rising home values continue to fuel the company's business.
Home Depot shares were slightly lower in premarket trading Tuesday as third-quarter earnings came in at $1.60 a share, beating analysts' forecasts of $1.58. Net sales rose 6.1% to $23.2 billion, ahead of estimates for $23 billion. U.S. same-store sales rose a solid 5.9% from the prior year.
The company raised its full-year earnings forecasts to $6.33 a share from $6.31 a share.
The world's largest home-improvement retailer likely has the prolonged increase in home values to thank for its better-than-expected results. Rising U.S. home values are leading people to view investing in remodeling their homes as a wise decision. "We believe home price appreciation, housing turnover, household formation and an aging housing stock in the U.S. continue to support growth in our business," said Home Depot CEO Chairman and CEO Craig Menear on a conference call.
The national median single-family home price reached $240,900 in the third quarter, up 5.2% from $228,900 a year ago and the last quarter's $240,700, according to the National Association of Realtors. It marked a peak in quarterly median sales price. Overall, the median existing single-family home price increased in 87% of the 178 metro markets that were measured.
Subsequently, the National Association of Home Builders recently said its home remodeling index rose four points to 57 in the third quarter. Anything over 50 signals an improvement.
"Home Depot's markets are still outperforming," noted Credit Suisse analyst Seth Sigman in a note ahead of the results. In particular, Sigman noted still healthy housing markets where Home Depot has a store nearby are continuing to fuel demand from contractors, and among consumers for appliances and other items online. Menear told analysts on the call that sales to contractors -- which Home Depot calls 'Pro' customers -- outpaced the company's overall same-store sales increase and that sales of appliances rose by a double-digit percentage.
"We believe home is the better play [relative to Lowe's] based on industry trends and specific initiatives, supporting third-quarter results at least in line or better than expectations," Sigman said. "If Home Depot can validate the health of the category, and thwart the growing late cycle concerns, the stock's price-to-earnings multiple should stabilize and the stock rise modestly."
It's easy to see why the market would be skittish on Home Depot and rival Lowe's (LOW) , whose stock has plunged about 14% over the past three months.
Existing-home sales reached a post Great Recession peak in June, and softened a little during the summer. Meanwhile, new home sales in September missed Wall Street forecasts by roughly 1.1%, while sales for August were revised down sharply to a 575,000 pace from a prior estimate of 609,000.