Is Home Depot Building a Bullish Stance on Housing?

The housing market has been a complete disaster over the past few years. Several factors contributed to a property bubble that eventually popped and left home-buyers scratching their heads. Many stocks related to housing crashed to unprecedented levels. However, one popular name believes the industry is finally on the road to recovery and continues to see its stock price climb higher.

On Tuesday, The Home Depot (NYSE:HD) announced impressive financial results for the third quarter. The world’s largest home improvement specialty retailer earned $947 million (63 cents per share), compared to $934 million (60 cents per share) a year earlier. Excluding items such as charges related to closing stores in China, the company earned 74 cents per share, beating estimates of 70 cents per share. Home Depot has now surprised to the upside in seven of the past eight quarters, with the one exception being this year’s first quarter that came inline with estimates.

In perhaps one of the most under the radar statements regarding housing, Home Depot believes that the industry has seen the worst and is starting to improve. Frank Blake, chairman and chief executive officer, explains, “Our third quarter results were better than we expected and reflected, in part, what we believe is the start of the path toward the healing of the housing market.” In the past, the company has remained quite neutral on the overall housing market.

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Although lending standards are tight and shadow inventory levels still provide uncertainty in the longer-term, Home Depot continues to rake in sales. Total revenue for the third quarter increased 4.6 percent to $18.1 billion, topping analysts’ estimates of $17.9 billion. Same-store sales gained 4.2 percent, with comp sales for U.S. stores rising 4.3 percent. Furthermore, the average ticket amount increased 2.9 percent to $54.55, compared to $53.03 a year earlier.

Investors were pleased with the financial results. Shares of Home Depot jumped more than 4.5 percent to hit a new all-time high above $64. Year-to-date, shares have surged 52 percent, easily outpacing the performance of Lowe’s (NYSE:LOW), which is up 27 percent on the year. As the chart above shows, Home Depot has been one of the best ways to play the housing market over the past five years, with shares more than doubling. Homebuilder stocks such as Lennar (NYSE:LEN), Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM) have also logged gains.

Looking forward, Home Depot expects the good times to continue. Due to its strong performance in the third quarter, the company raised its full year adjusted earnings forecast to $3.03 a share, compared to its prior view of $2.95 a share. This implies fourth quarter earnings of 62 cents per share, topping analysts’ estimates of 61 cents. The improved outlook also reflects the company’s intention to repurchase $700 million in additional shares this quarter, bringing the total amount of buybacks for 2012 to $4 billion. The raised guidance does not include any positive impacts from superstorm Sandy.

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