There is a big debate going on now on whether the housing market is primed for a setback in the foreseeable future. Over the last few years, the U.S. housing market has seen superlative growth with strong housing starts and home sales. Prices in prime areas of the country have seen incredible price increases.
A friend of mine who lives in New York City has seen his tiny 400 square foot studio rise in value from $120,000 to the current $600,000 in only a few years. But, there is increasing evidence that the party is showing some signs of cracking. Home sales may be set to falter, but I believe an area that may continue to be strong is the home renovation area.
Consider that housing starts for January were stronger than expected at 2.276 million versus the estimate of 2.023 million. It was a big surprise for the market and was also the highest reading in several years. Building permits for January were also stronger than expected at 2.217 million versus the estimate of 2.068 million. It was also the highest reading in several years. These numbers are positive for home renovation and supply companies.
On Tuesday, The Home Depot Inc. (NYSE/HD), the country’s largest home improvement store chain, reported a very impressive fourth quarter, reflecting the continued strong demand for renovation of existing homes and supplies for new homes.
In the fourth quarter, year-over-year earnings growth was 23% to $1.29 billion, or $0.60 a diluted share, up from $1.04 billion or $0.27 a diluted share for the comparative period. The earnings easily beat the consensus Wall Street estimate of $0.56. For Home Depot, everything is on the right track as it has beaten Street estimates for four straight quarters. Year-over-year revenue growth was similarly strong at 16% to $19.49 billion, while the key same-store sales for stores opened at least one year rose 5.50%. Yearly numbers for revenue and earnings were also ahead of Street estimates.
As I have said in recent commentary, Home Depot is the stock to own in the home improvement area. The company’s proposed expansion into China, which is a builder’s dream, could have excellent potential if it can catch on.
Also in an effort to diversify its revenue stream, Home Depot has a five-year plan to shift some revenue away from retail to its unit that serves professional contractors. This will means less new store openings. In addition, Home Depot is looking at setting up gas stations at some of its stores and is currently testing this. If successful, plans call for up to 300 gas stations by 2010.
Home Depot is running in high gear now, but there is still some room to grow.