Markman Targets Home Depot

06/09/2006 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

"While people may not be buying new homes, they may need to update their house for their expanding family or growing kids; so, the obvious answer is to remodel or at least redecorate," says swing trading expert, Jon Markman. Here, he looks at Home Depot.

" Home Depot (HD NYSE) is the nation's second largest retailer and is a member of our Dow Select List. If you believe that the point of long-term investing is to buy low and sell high, this is probably one of the former. Shares are low because investors are uncertain about whether HD can muster the sort of earnings growth that has characterized its spectacular advance of the past two decades. I happen to think that it can. Not just because I'm a natural optimist but because managers have so many levers that they can pull to make it happen.

"HD may not trade at a price/earnings multiple of 20 again in our lifetimes, but it can certainly trade at 14 times earnings. And its executives' ability to both ratchet down on back-office spending, buy back stock, lift the dividend, and add new growth areas like commercial builders' supply-chain management makes me think that this great company can certainly grow in the mid-teens. First-quarter earnings will be reported next week, and with such low expectations out there, I think the stock will jump.

"My forecast is for 69 cents per share in the quarter, which is two pennies ahead of consensus estimates, and same-store sales growth of 4.6%. I also see the potential for $3.62 in fiscal 2008, which is about 5% above current estimates. If you apply a 14X multiple to that, you get my 12-month target of $51, which is about 25% above the current price. That makes it a buy now and over the summer.

"For what it's worth, you should also know that home improvement stores have bounced off trough multiples in the past shortly after the Federal Reserve has concluded its rate-hike campaigns, according to Piper Jaffray. Now that the Fed has lifted rates at 15 meetings in a row, it is surely much closer to its end point than its start, and that is another reason to pick up this dirt-cheap, world-class innovator this month."

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