The Home Depot, Inc. (HD) continues to deliver strong results in a challenging environment.

It recently reported an 18% increase in EPS year-over-year on a 4.2% increase in same-store sales. Management also raised its earnings guidance and raised its dividend by 16%.

And analysts continue to raise their earnings estimates. It is a Zacks #2 Rank (Buy).

Strong Third Quarter Results

The world's largest home improvement retailer reported third quarter EPS of 60 cents, beating the Zacks Consensus Estimate by a penny. It was a 16% increase over the same quarter in 2010.

Sales rose 4% to $17.326 billion, ahead of the Zacks Consensus Estimate of $17.123 billion. This was driven by a 4.2% increase in same-store sales, including a 3.8% increase in the United States.

Operating income rose 12% year-over-year as the company leveraged its fixed expenses.

Strong Growth Ahead

Management raised its guidance off of the solid third quarter and now expects to earn $2.38 per share. The Zacks Consensus Estimate for 2011 is slightly above guidance at $2.40, representing 18% growth over 2010.

The 2012 consensus estimate is currently 15% higher at $2.75.

Analysts believe a combination of a recovery in consumer spending in the US, operating leverage and share repurchases will drive double-digit EPS growth over the next few years.

Strong Free Cash Flow

The Home Depot also continues to generate strong free cash flow, which it has been using to return value to shareholders through stock buybacks and dividend hikes.

Through the first 9 months of 2011, it spent over $3 billion buying back its stock. The company also noted that it intends to complete the remaining $6.8 billion of share repurchases under its current authorization by the end of fiscal 2014.

Management also raised its quarterly dividend by 16% late in 2011. It currently yields a solid 2.7%. Since 2000, Home Depot has raised its dividend at a compound annual growth rate of 22%.

Reasonable Valuation

The stock is soared 20% since I last wrote about Home Depot on October 18. But the valuation picture still looks reasonable.

Shares trade at 15.9x 12-month forward earnings, a discount to the industry average of 18.4x. It sports a PEG ratio of 1.15 based on a consensus 5-year growth rate of 13.8%.

The Bottom Line

With solid earnings momentum, strong growth projections, shareholder-friendly management and reasonable valuation, The Home Depot offers a lot to like.

This Week's Growth & Income Zacks Rank Buy Stocks:

A. Schulman, Inc. (SHLM) recently delivered better than expected results for the first quarter of its fiscal 2012 as earnings per share jumped 53% year-over-year. Analysts revised their estimates higher for the rest of 2012, sending the stock to a Zacks #2 Rank (Buy). The company also pays a dividend that yields a solid 3.1%. Valuation looks attractive too, with shares trading at less than 10x forward earnings. Read the full article.

The Sherwin-Williams Company (SHW) delivered better than expected third quarter results despite a difficult environment. It is a Zacks #2 Rank (Buy). The paint company is well positioned to benefit from an improving housing market, and analysts expect strong double-digit EPS growth over the next few years. Moreover, management is very shareholder-friendly and has increased its dividend every year since 1979. It currently yields 1.6%. Read the full article.

Corn Products International, Inc. (CPO) a leading corn refiner, continues to benefit from a burgeoning middle class in the emerging markets. Despite the recent volatility in its share price, consensus estimates have risen steadily over the last several months. It is a Zacks #1 Rank (Strong Buy) stock. The valuation picture looks attractive with shares trading at just 10x forward earnings. The company also recently raised its quarterly dividend by 25%. It currently yields 1.5%. Read the full article.

U.S. Bancorp (USB) is not your typical big bank. The company delivered its 6th consecutive positive earnings surprise in the third quarter of 2011, as EPS jumped 42% year-over-year. This prompted analysts to revise their estimates higher off the strong quarter. Based on consensus estimates, analysts expect 40% EPS growth in 2011 and 10% growth in 2012. On top of this, the company pays a dividend that yields 1.8%. Read the full article.

Todd Bunton is the Growth & Income Stock Strategist for and Co-Editor of the Reitmeister Value Investor.


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