On the heels of a terrific fourth quarter, Motley Fool Inside Value pick Home Depot (NYSE:HD) seems bullish about its future growth prospects. I just wish I could share the company's optimism.
Beating out analyst expectations, Home Depot's revenue rose 16% to $19.49 billion, compared with $16.81 billion in the year-ago period. Earnings were a hearty $1.29 billion, which translates to $0.60 in earnings per share. This was the largest EPS increase in two years, largely due to exceptional sales figures.
Understandably, management is confident that the company will continue to gain momentum and strength. Their exuberance has even led Home Depot's board to approve an additional $1 billion in share repurchases, bringing the total buyback authorization to $12 billion. This company is clearly confident in its sales and future growth.
However, due to the changing trends in the national housing market, I am unable to agree. Recent years have seen record growth in the housing market, swelling the ranks of homeowners. Naturally, sales for home improvement products have increased in parallel. I'm compelled to think that this macroeconomic trend, more than effective management, may be the reason for Home Depot's recent success. While there could be an alternative explanation for the increase in sales, the high correlation between Home Depot's sales and those of the housing market in the last few years suggests a causal relationship.
This claim is bolstered by the fact that Home Depot is not alone in its increased sales. Key competitor Lowe's (NYSE:LOW) also had a stellar quarter, demonstrating the strength of the industry as a whole. Strength in an individual industry would be a blessing if it were likely to continue, but given the state of the housing market, I'm not certain it will.
As interest rates rise and home prices fall in certain parts of the country, analysts are predicting a serious reduction in home purchases over the next few years. In response, I can't help but believe that the home improvement industry will experience some decline as a result. On the flipside, the decrease in housing prices could result in more do-it-yourself expansions, as people try to improve the value of their property. That might lead to more good times for Home Depot.
I consider this possibility unlikely; a marked rise in foreclosures indicates that despite recent strong housing and spending trends, some people can't afford their homes, let alone home improvement. And since Home Depot has seemingly gained from the housing market's strength in its latest quarters, it's not unreasonable to think that a weakening housing market might similarly crimp its results.
For further Foolishness, see Home Depot's Q4 and FY 2005 by the numbers.
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Tarek Sultani is a freelance journalist and likes to think of himself as a handyman. He has no financial interest in any of the companies mentioned in the article. To comment on this article or to debate intricacies of the Allen wrench, email him at [email protected] .
