Wednesday, July 05, 2006

Calls of Note Part 3

Two firms defending Home Depot (NYSE:HD) today:

* Piper Jaffray saying that following recent meetings with Home Depot management, they are maintaining Outperform rating and $49 price target as they believe the current valuation is overly discounting a slowing housing market (which was factored into Home Depot's FY06 guidance) and the long-term growth prospects of the HD Supply segment.

Investor concerns surrounding the macro environment seemed to dominate the meetings that the firm hosted last week, and these concerns have weighed heavily on HD shares since the beginning of the year (HD shares are down -11.0% compared to a +2.5% gain in the S&P 500)

Historically, the stock performances of the home improvement retailers have improved moving off trough multiples shortly after the conclusion of the Fed tightening cycle. When the firm upgraded HD shares late last year, they were anticipating the conclusion of Fed action in early 2006, but that catalyst has since been pushed out to 2H06 or possibly later.

* Jefferies recommends purchase of HD shares, which are selling at just 10x firm's out year estimate as compared with a 19.7% EPS CAGR over the past five years. Even if a cyclical downturn were to cause a 15% reduction in '07 forecast, the multiple would be only 11.5x.

New home sales, which are fairly cyclical, account for only about 20% of domestic housing turnover, with less-cyclical sales of existing homes having much greater importance. During the past two decades Depot has continued to generate impressive earnings results even during periods of declining new home sales and reduced housing turnover.

While management has provided guidance of 9%-to-14% EPS gains at the beginning of each of the past several years, EPS have actually increased by more than 20% during each of the past four years and again during this year's first fiscal quarter as the company has continually beaten Wall Street expectations.

Not actionable but good to know category.

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