Why Home Depot Shares Are Outperforming

On an otherwise tepid day on Wall Street in which the Dow Jones Industrial Average (INDEX: ^DJI  ) is up a forgettable 11 points, there's one stock that's clearly outshining the rest: Home Depot (NYSE: HD  ) . With only 50 minutes left in the trading session, shares in the home improvement retailer are trading higher by 4.1%.

Home Depot's third-quarter earnings
This morning, Home Depot reported its earnings for the fiscal third quarter, beating the consensus estimates on both the top and bottom lines. Excluding one-time items, the company earned $0.74 a share on $18.1 billion in revenue, beating analysts expectations of $0.70 a share on $17.9 billion in sales. In addition, domestic same-store sales increased by 4.3% compared with the average prediction of 3%.

According to chairman and CEO Frank Blake, "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."

Perhaps more uplifting than its performance over the preceding three months was the company's announcement that it now sees full-year sales growing by 5.2% compared with the previously issued guidance of 4.6%. This notably bucks the trend of many other blue-chip stocks. Earlier this year, as I discussed at the time, Intel (Nasdaq: INTC  ) lowered its forward revenue and earnings guidance, noting that a "challenging macroeconomic environment" was causing "softness in the enterprise PC market" as customers were "reducing inventory in the supply chain versus the normal growth in third-quarter inventory."

And following on Intel's heels, Caterpillar (NYSE: CAT  ) lowered its full-year sales outlook to $66 billion from a previously forecast range of $68 billion to $70 billion. Following a roughly similar script, the equipment maker's CEO said: "The decline in the sales and revenues outlook reflects global economic conditions that are weaker than we had previously expected. In addition, Cat dealers have lowered order rates well below end-user demand to reduce their inventories."

There are two factors that appear to have separated Home Depot from the majority of its blue-chip peers. First, the housing market, which serves as Home Depot's bread and butter, has unquestionably turned the corner. In the middle of last month, for example, housing starts surged an impressive 15% to the highest level in four years. And second, while Home Depot declined to provide specifics, there's little doubt that Hurricane Sandy played a pivotal role in driving sales of things like generators at the massive big-box retailer's stores.

The one notable negative impact on Home Depot's unadjusted earnings was an $0.11 per-share charge related to its closure of stores in China. The company had expanded there in the hopes of replicating its success in the U.S. market. However, it has run into a number headwinds that have impeded such progress.

Because the apartment market is so dominant in many heavily populated areas, the expenditures on home improvement products in China are significantly lower. And because labor is so inexpensive there, fewer people employ the do-it-yourself model of home repairs, choosing to hire professionals instead.

As a result, Home Depot had previously announced that it was closing seven of its mainland China stores. According to Fox Business: "Home Depot's China team should finish the process of closing stores there by the end of the month and then can devote more attention to exploring other formats. [The company's chief financial officer Carol Tome] noted that the company's stand-alone paint-and-flooring store in China has performed better since the closures."

The Foolish bottom line
Shares in Home Depot are up more than 50% year to date. But to read why Caterpillar could ultimately overtake it, check out our in-depth report on the equipment maker by clicking here now. The report comes with a year of updates, so claim your investing edge today.


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