Big Orange, better known in the do-it-yourself retail business as Home Depot (NYSE:HD), turned in another great quarter. Second-quarter sales increased 11.7%, and net income shot ahead 17.1%.
Today's results, besides being records, beat analyst estimates. Of the 12 analysts providing revenue projections, not one aimed as high as the $22.3 billion Home Depot registered. Fully diluted earnings topped the average estimate by $0.03 a share and matched the highest projection. To say the least, it was a blockbuster quarter.
The company also upped earnings guidance. Although 2005 projected sales growth stayed at 9% to 12%, earnings (the "E" in P/E) got a big boost from 10% to 14% growth to between 14% and 17% growth. That's great for a giant retailer with expected annual sales of $80 billion this year.
Big Orange's numbers, though, were overshadowed by competitor Lowe's (NYSE:LOW). The showoff No. 2 in home improvement retail, dressed in its pretty shades of blue, reported a 17.3% increase in sales and a 19.7% jump in net income.
Big Orange has two solid advantages over its blue competitor. First, Home Depot posted quarterly operating margins at 12.7%, while Lowe's managed only 11.4%. Home Depot also has its balance sheet in its favor. In 2004, it invested heavily to improve its customer experience -- from better lighting and displays to faster, more convenient self-checkout systems. 2005 investments are focused on automating receiving at the stores. Seeking a catalyst for continued growth, the company has also concentrated on acquiring businesses outside of its traditional realm, many of which serve commercial interests.
Between these initiatives and the company's aggressive share-repurchase program, cash declined and debt increased, although Home Depot's $2.3 billion in cash still exceeds its $2.2 billion long-term debt.
To be honest, these are two great companies. Lowe's is growing faster and is expected to grow earnings 18% annually for the next five years (vs. 10.7% for the S&P 500). Its P/E is projected to be 16.8 for the year ending January 2007. Home Depot's five-year annual growth is estimated at 14% -- and the stock is selling for 14 times forward earnings.
Given their growth rates, solid finances, and valuations, both stocks are attractive for long-term investors to consider -- although Home Depot holds the distinction of being a Motley Fool Inside Value recommendation.
Stubborn contrarians will note that both companies are widely exposed to trends in consumer spending, ostensibly tied to interest rates and disposable income. Given the reported uptick in inflation (because of higher gas prices), it's not unreasonable to say that consumer spending growth might slow down. Hence, those seeking the very essence of a value play might wait a bit, since an economic swing might present a very attractive buying opportunity.
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Fool contributor W.D. Crotty owns shares of Home Depot. Click here to see The Motley Fool's disclosure policy.
