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Is Home Improvement Improving That Much?

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Home Depot (NYSE: HD  ) investors put out the welcome mat for the home-improvement retailer's good quarterly tidings, but let's not forget the foundation remains a bit shaky.

The company reported a better-than-expected profit. Second-quarter net income increased 12% to $1.53 billion, or $1.01 per share. Analysts had expected a profit of $0.97 per share. Home Depot also updated its fiscal 2012 guidance to reflect a better earnings outlook for the year, anticipating a 19% profit jump to $2.95 per share.

Although some customers might have shelled out more to pretty up their homes, Home Depot's sales growth wasn't exactly robust. Same-store sales increased 2.1%, and comps in the U.S. jumped 2.6%. Total sales increased just 1.7% to $20.6 billion.

It should be interesting to see how rival Lowe's (NYSE: LOW  ) compares when it reports its results on Aug. 20, but the second quarter is a significant one for home-improvement retailers. Warmer weather early this year resulted in some home-improvement spending transacted in the first quarter, but still, there's good reason to believe things will become far less bullish for companies like Home Depot during the rest of the year.

The macroeconomic outlook is choppy, and the housing market continues to plant a big question mark on the competitive landscape. This quarter's earnings season has been touch-and-go as many consumer-facing stocks have faced frugal spenders and fickle shopping habits.

On one hand, Whole Foods Market (Nasdaq: WFM  ) delivered a stellar surprise, but then stocks like McDonald's (NYSE: MCD  ) and Chipotle (NYSE: CMG  ) have had more disappointing quarterly tidings to share, and their share prices have receded quite a bit. The latter two look like bargains for savvy investors who are in stocks for the long haul. The current environment is putting some buy opportunities into investors' shopping carts.

On the other hand, shares of Home Depot have risen about 60% in the past year; much of that share appreciation is probably hinged on investors' hopes for an improving housing market. However, that's hardly a given in the near term. Meanwhile, Home Depot trades at 16 times forward earnings. You could argue that's not too unreasonable when weighed against growth expectations for the next two years, but then again, if the foundation is as shaky as I think it is, it's too dear a price to pay.

When companies cut spending, repurchase shares, and boost earnings, it can seem heartening, but the truly bullish sign would be far more robust sales figures than Home Depot delivered. Investors should leave home improvement alone and go for other high-quality stocks whose prices have gotten the wrecking ball recently. Home Depot's bubbly stock price has a lot to lose for the rest of the year.

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Alyce Lomax owns shares of Whole Foods Market. The Motley Fool owns shares of Whole Foods Market, Chipotle Mexican Grill, and McDonald's. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, Home Depot, McDonald's, and Chipotle Mexican Grill and writing covered calls on Lowe's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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Related Tickers

10/28/2016 10:32 AM
HD $122.93 Up +0.67 +0.55%
Home Depot CAPS Rating: ****
CMG $372.79 Up +4.20 +1.14%
Chipotle Mexican G… CAPS Rating: ****
LOW $67.16 Down +0.00 +0.00%
Lowe's CAPS Rating: ****
MCD $111.96 Down -0.12 -0.11%
McDonald's CAPS Rating: ***
WFM $28.64 Up +0.35 +1.22%
Whole Foods Market CAPS Rating: ****