Boom in New U.S. Homes Could Be Latest Boost for Home Depot

A wave of new homes being built this fall in the U.S. could lead to more nails and plywood being bought from Home Depot (HD)  during the fourth quarter than many on Wall Street currently expect.  

Construction on new homes spiked by about 26% in October to the highest level in nine years, according to new data released Thursday from the Commerce Department. Housing starts increased in all four regions last month. Home Depot's stock rose by as much as 3% in the wake of the news.

The latest read on starts comes as Home Depot has continued to benefit from the sustained rise in the U.S. home values. Rising U.S. home values are leading people to view investing in remodeling their homes as a wise decision, either opting to undertake projects themselves or hire an outside contractor.

"Our customer is looking at his or her home and saying it's worth more today than it was yesterday. So their home has more value, there is a wealth effect," Home Depot's CFOr Carol Tome told TheStreet in an interview this week.

Home Depot's 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 forecast to $6.33 a share from $6.31 a share.

Home Depot told analysts on a conference 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.

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 the 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. In particular, Sigman said 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.

The tone among Home Depot executives on Tuesday was markedly different than Lowe's (LOW) on Wednesday, suggesting the world's largest home-improvement retailer is the dominant force fueling the continued strength in the U.S. home remodeling market. And that it could grab an out-sized share of the strong demand for building materials this fall that seems logical off the fresh read on housing starts. Investors seem to agree: Lowe's stock lagged Home Depot's on Thursday, rising by only 0.8% on the upbeat housing starts news.

The second largest home-improvement retailer reported third-quarter earnings of 88 cents a share, badly missing Wall Street estimates for 96 cents. Net sales rose 9.6% from the prior year to $15.7 billion, trailing projections for $15.8 billion. Lowe's slashed its full-year earnings outlook to $3.52 a share from a previous $4.06.

"Our third-quarter operating results were below our expectations due to slower sales in the first two months of the quarter. While we expected moderation in the second half of the year, traffic slowed more than we anticipated in August and September before improving in October, which put pressure on our profitability in the quarter," said Lowe's Chairman and CEO Robert Niblock in a statement.

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