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The Home Depot, Inc. (HD) Possible Short-Term Buy, Long-Term Overpriced

 November 21, 2012 11:16 AM

(By Rich Bieglmeier) Kings and queens are fixing-up their new castles as home sales have improved during recent months. The uptick in homebuyer activity means many are turning houses into homes with personal touches. Additionally, the rise in home prices and consumer sentiment has existing homeowners jazzing up the joint with new paint, carpet, appliances…

iStock sees evidence of this trend in the cluster of home-related industries dotting today's sector performance review. Today, iStock will highlight a company that any homeowner has heard of and most likely visited, The Home Depot, Inc. (HD).

[Related -The Home Depot, Inc. (NYSE:HD): More Room For Improvement]

HD and Lowe's Companies Inc. (LOW) are probably the most prominent names in the home improvement sector. On November 13th, The Home Depot reported third-quarter earnings of 74 cents per share. Wall Street's consensus was 70 cents.

Management told the conference call attendees that clean up from Sandy should contribute to growth in coming quarters, with a total that could surpass hurricane Irene's $360 million. The cost for Sandy is expected to top $20 billion which is 25 percent higher than Irene. So, in a sick way, the superstorm should be a positive for HD shareholders.

As we mentioned up top, housing is becoming a driving force and CEO Frank Blake says it is "an assist to our growth rather than an anchor." The top dog added, ""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."

[Related -A Pause In The Action]

Since earnings, shares have flirted with making new 52-weeks highs, but have stalled each attempt to bypass $64.44. If the Dow component's price can get to the better side of resistance, then iStock's technical outlook is for HD shares to challenge $72ish, completing an A-B-C move on the five-year chart.

For next-fiscal year, the analyst consensus targets $3.46 in earnings per share, up 14.20 percent for the current year's estimate of $3.03. Meanwhile, Home Depot's forward P/E of 19.34 means most of the stock's move could be in the rearview mirror.

Already, the stock is valued it a five-year high on a price-to-book, price-to-sales and trailing twelve month price-to-earnings basis. From our perspective, it's hard to imagine the home improvement store generating enough revenue and earnings growth to warrant valuations that take the stock beyond the A-B-C technical pattern target of $72 and change.

Overall, we think The Home Depot, Inc. (HD) could make for a nice, short-term trade if the stock closes at a new, 52-week high. Otherwise, we'd rather see the stock in the $50-$52 range before entering with a longer-term time horizon.

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