Why Home Depot is Built to Last
Even in a tough housing market, home improvement retailer Home Depot (HD) is finding ways to profit big.

When you think about companies that are in rough shape after the economic downturn, most of the big names are related to the meltdown in the real estate market. From banks plagued by bad mortgages like Bank of America (NYSE:BAC) to builders like Lennar (NYSE:LEN), the housing crash hurt a host of big-name businesses nationwide.

But you might be surprised to learn that Home Depot (NYSE:HD) is thriving. While many banks and builders crashed and burned, the home improvement retailer held firm during the worst of the downturn and has rebounded strongly as of late. HD will report its third-quarter profits Tuesday, and many expect too see impressive numbers yet again from the company.

So what gives? Why is it that a volatile stock market, high unemployment and a harsh real estate market has failed to shake Home Depot — even as its peers suffer?

Here are three big reasons explaining the success of Home Depot, and why the company is going strong:

Investors Believe in Home Depot: As mentioned, many housing-related stocks have fallen and fallen hard. But not Home Depot. Consider BofA is down almost 90% in the last five years, Lennar is down more than 60%, and top competitor Lowe’s (NYSE:LOW) is down 20%. Home Depot actually is sitting on a modest gain in stock price across those same five years! Even the broader S&P 500 Index has a five-year return in the red, showing that HD stock has not just outperformed housing stocks, but has beaten the entire market.

Booming Balance Sheet: Home Depot posted just a single quarterly loss across the entire recession — and has rebounded strongly in the past two years. Fiscal 2011 earnings were up almost 50% above 2009 numbers, and the company has posted year-over-year profit increases for seven consecutive quarters. Meanwhile, top competitor Lowe’s just reported earnings this morning that were pretty ugly — a 44% slump in third-quarter profit thanks to store closings and discontinued projects offsetting an overall increase in sales. Lowe’s cut its 2011 full-year outlook as a result. HD earnings would be impressive alone, but considering #2 home improvement retailer Lowe’s is hurting it makes Home Depot look all that more impressive.

More Growth to Come: Fiscal 2012 earnings projections shows gains of 70% above recession-era lows, and earnings per share 18% above this year’s levels. Analysts are tracking five-year annualized growth of 13.5% for Home Depot, indicating this is part of a long-term growth trend. While lots of companies are recovering and growing, too, they just can’t keep up with Home Depot.

There are plenty of other signs of strength at Home Depot, too. The company has drawn down $3 billion in debt, and its total debt service has a relatively cheap blended rate of just 5.6%. The 2.6% dividend beats Lowe’s 2.4% and the average 2.3% dividend yield among all S&P 500 stocks.

It might seem counterintuitive to think that the nation’s biggest home improvement retailer can be going like gangbusters even while the housing market remains troubled. But a look at past numbers clearly shows this is the case — and Tuesday’s Home Depot earnings report likely will reinforce this trend.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

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