Home Depot and its surprising rebound

By Michael Santoli | Michael Santoli – Fri, May 31, 2013 1:24 PM EDT

Reuters

Home Depot Inc. (HD) shares have blasted higher by 120% over the past two years, making it by far the best-performing member of the Dow Jones Industrial Average, which itself is up 25% over that span.

The Atlanta-based home-improvement chain embodies every theme that is now animating the current run by major U.S. stock indexes to fresh all-time highs.

First, Home Depot is a huge beneficiary of America’s housing rebound – which is viewed worldwide as the key source of economic growth over the next couple of years. The S&P Case-Shiller home-price index covering 20 big cities rose more than 10% in the past year, and the number of existing homes sold has climbed for 22 straight months.

A crucial investable growth theme

With growth in erstwhile boom countries China and Brazil far weaker and Europe stuck in a grinding recession, the U.S. housing-led recovery is considered the crucial investable growth theme on the planet. Two investment strategists at New York firms last week reported independently that, in visits to clients in Hong Kong and Indonesia, investor questions centered on the turnover of houses in Phoenix and Miami.

The latest Bank of American Merrill Lynch survey of global fund managers found the highest percentage betting heavily on U.S. real estate-related stocks since 2007. Given Home Depot’s hefty $117 billion market value – dwarfing that of all American homebuilding and lumber stocks combined – it is among the few bellwethers large and well-known enough for foreign investors to own as a housing play.

Home Depot also illustrates another dominant theme of this market cycle: It has managed to convert slow consumer-spending trends and middling revenue gains into hefty profit growth, by controlling costs tightly and employing some popular financial engineering among big companies today.

Last year the number of transactions with Home Depot shoppers was only 4.5% above 2010 levels. Net sales grew 3.5% in 2011 and 6.2% in 2012, lifting total net profits 5.5% and 6.1%, respectively. Yet through the magic of stock buybacks, the modest profit progress translated into per-share earnings gains above 20% in each of the past two years.

A vast number of big companies are using plentiful cash on hand and the cheap debt produced by rock-bottom interest rates to buy piles of their own shares, in order to goose per-share reported profits and give remaining shareholders a bigger proportional slice of the company.

A major driver

This sort of financial engineering has been a major driver of the market’s climb in recent years, making profits look better despite slow overall growth, and cashing out shareholders who can then recycle the money in other stocks.

Home Depot has been among the most aggressive, repurchasing a total of $10 billion worth of stock in the past three years, reducing its outstanding share count by some 10% in the process. This kind of balance-sheet management makes good sense when a company’s stock is undervalued and other high-return projects are unavailable.

Yet Home Depot is an expensive stock by most any measure, at 20-times the average of the next two years’ forecast per-share earnings, versus less than 15-times for the broad Standard & Poor’s 500 index. Home Depot’s stock-price-to-sales ratio, a common gauge used for retailers, is over 1.5, among the highest in an industry where the likes of Costco Wholesale Corp. (COST), Target Corp. (TGT) and Home Depot rival Lowe’s Cos. (LOW) have ratios below 1.

[See related: Retail Reports: The 3 Things to Watch for in Costco’s Earnings]

One reason Home Depot is pricey, of course, is that its management has done an excellent job of improving store-level performance and taking market share from the likes of Lowe’s, which is struggling – all while maintaining strict financial discipline. When stocks become as popular as Home Depot has, it is never entirely accidental or undeserved.

Home Depot has also, to a lesser degree, sent cash back to investors through dividend payments, which rose by 11% last year over 2010 levels. As with the market in general, for most of the rally a central argument for owning stocks has been their dividend yields, which have broadly been those of Treasury bonds. Yet this case is now weaker, with the rally compressing the dividend yield and the bond-market selloff lifting Treasury rates.

This week the S&P 500 yield, near 2%, fell below the 2.15% yield on the 10-year Treasury for the first time in quite a while. Home Depot’s yield is right in line with the index at 2%.

This doesn’t automatically thwart the upward trend in the market, or in Home Depot. But it removes one important verse of the bulls’ favorite song.

Combined with valuations that are no longer cheap, with much credit for a multi-year housing recovery already priced into stocks, both Home Depot and the market as a whole have less margin for error should any cracks appear in the economic picture.

Perhaps this is why Home Depot is listed by Goldman Sachs (GS) market analysts as among the top 10 “very important short positions for hedge funds,” which have placed relatively heavy bets against the stock – likely because of its stretched valuation, or as a hedge against the multitude of other current investments that hinge on the pace of the housing boom, cheap credit and consumer stamina.

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What Apple really won from the landmark patent trial

Anyone, arguably even someone who is partially blind can see that Samsung’s mobile and tablet products bear a striking resemblance to Apple’s. So Friday’s verdict of the landmark, billion dollar patent trial should have come as no surprise; Apple walked away with $1.05 billion. While this billion is great, it is chump chain to Apple who is worth over $650 billion. So if the money isn’t such a huge gain for Apple, what is?

What Apple really won is the global branding and product war. With the verdict, Samsung’s success can now legally be attributed to their illegal infringement on Apple’s products. Apple’s highly anticipated iPhone 5 is expected to arrive in September, and there is a high level of certainty that it will very similar to Samsung’s flagship phone, the Galaxy SIII. Holding the most current phone models side by side, the most distinct difference is the size of the devices: the iPhone 4S has a screen of 3.5 inches, while Samsung’s Galaxy SIII boasts a 4.8 inch screen. Although the iPhone 5’s design is shrouded with secrecy, the one physical feature that is as sure of a bet as the sunrise in the morning is that it will have a larger screen making these phones resemble each other more than they already do now. Instead of being labeled as copying the Samsung Galaxy SIII, Apple’s iPhone 5 will be viewed as a natural progression of its product line and keep Apple’s track record of innovation intact.

Samsung should have listened to their friends at Google who warned them that their products looked too much like Apple’s. “Google is demanding distinguishable design vis-à-vis the iPad for the P3 (the original 10-inch Galaxy Tab),” an email written by Samsung on Feb. 22, 2010 said, following a meeting with Google. “Since it is too similar to Apple, make it noticeably different, starting with the front side. Please give it a lot of thought, particularly to landscape orientation,” another email from Samsung designer Cho told his team, following the Google meeting.

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LEGO Celebrates 80th Birthday With Animated Short [VIDEO]

LEGO, the Danish toymaker, is celebrating its 80th birthday with an enlightening animated video about the company’s history for all to enjoy, just like their toys.

The 17-minute video describes LEGO through the eyes of its visionaries, who make up three generations Christiansens: Ole Kirk Christiansen, who created the company in 1932, his son Godtfred, LEGO’s second owner, and current owner Kjeld, the founder’s grandson.

LEGO’s history is reminiscent of their toys. There are endless possibilities of creativity with LEGO toys, and its visionaries took the same claim to heart. Fires and hard economic times plagued the company for much of its start, but with determination, focus, and creativity the Christiansen family continued to diversify their product line and bring a whole new meaning to lego, which means “I put together” in Latin.

The LEGO story is full of lessons vital to run and grow a successful company, lessons that are shared by other great companies today. Just like Apple, some key takeaways from the LEGO story are the importance of making ideas come to life, and quality products.

Enjoy the full video!

Qatar named the World’s Richest Country, Per Capita

Qatar, a country 1/10 of the size of New York state has been named the richest country in the world per capita. Forbes Magazine, which ranked the country at the world’s wealthiest in 2011, stated the GDP per capita is $88,222.

The small country located in the Middle East is blessed with the world’s 3rd largest natural gas reserve, and has been benefiting with the rebound of oil prices. Its wealth is solely due to its surplus of natural gas reserves, and Qatar’s economy doesn’t have much more to offer, at least nothing significant. The country is an extremely conservative Muslim nation, which sometimes requires a visa just to LEAVE the country (this is the case with the Lebanese passport).

Some projects are underway to have the country become a “knowledge economy” including Education City and Qatar Science and Technology Park. Qatar is investing heavily infrastructure including the development of a deepwater seaport, an airport and a railway network, “all with the eye to make the country a better host for businesses and the 2022 World Cup.” But in order for this to be successful, a country as a culture must modernize.

WIN: Best Viral Commercial EVER!

This is by far the best online commercial in history. Gosh, if only more commercials were like this then they may be tolerable to watch again. We won’t say anything else and spoil the surprise, check out the commercial for yourselves:

Do you like this? Then SHARE IT!

WIN: Amazing Audi Commercials

Opinions towards commercials can be very subjective. As we saw after the 2012 Superbowl, viewers rated a dumb Budlight beer commercial with an ugly dog fetching beers as the #1 Superbowl commercial.

This example teaches anyone in marketing the most important lesson: know your target audience. Even if a commercial lacks creativity and originality, as long as your audience enjoys watching an ugly dog fetching beers, it will be rated as the #1 commercial during the most expensive TV spot of the year.

But do you know what doesn’t lack creativity and originality? Audi’s winter and Superbowl commercials. Creative, catchy, and original – these commercials were very well done.

Referring to the article, Target: Best Holiday Commercials, the Audi TV spots met every criteria of a great commercial. Nice intro, great sell of value propositions, and very clever.

Check them out:

WIN: Bing

When my generation (I was born in 1987) — started using Google, Yahoo, and Bing – they served one purpose – they were search engines whose job it was to help us find things on the internet.

But with explosion of Google and their continuous innovation, these sites mutated to encompass almost every part of daily life. These search engines have become our calculators, maps, place to find reviews, our news, and library of billions upon billions of images just to name a few. In some respect, “search engines” have become an extension of our brain. A place where we know information is stored and available to us 24/7 (internet access required).

Some of these features were once exclusive to Google, but as time goes on in any industry and for any product, features are copied or created in a similar fashion. Unless a company is tied down by corporate contracts or restricted by patents, features become obsolete as a unique selling proposition.

So how do companies compete then if their products are very similar and the market is saturated? Easy, you steal the others’ customers. There are several ways of doing this, for example by increasing awareness, implementing branding/marketing initiatives, or by building partnerships with other companies.

The most cost effective way of converting customers is through the third option, partnerships, and this is exactly what Bing has done here. Bing is competing against one of the most loved brand in the world, Google, and has tried everything to gain market share. Commercials and sponsorships, Bing even teamed up with the Tailgating Institute of America and waged a marketing blitz in the parking lot at the 2011 Superbowl.

What Bing did recently, and in the photo at the top of this analysis – is one of the smartest partnerships I have seen. Bing partnered with Facebook (the most powerful and visited website in the world) to translate wall posts that are not in the native language of the logged in Facebook user.

Genius! Looking at the image above, you notice it says “Translation by Bing”. You know what that means? Free marketing to over 500 million people, all over the world! The costs of this partnership, I don’t know. But I can say with a high level of confidence that this most likely cost less than the dumb tailgating event Bing did at Superbowl 2011. Great WIN, Bing!

Oh yeah, and congratulations Bing on just taking the spot as the second most used search engine, for the first time ever! Good thing Microsoft didn’t buy Yahoo!….we will discuss this in more detail later.

 

 

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WIN: Google Chrome web browser

If you know anything about the internet and safety, you know that the web browser, Internet Explorer, cannot be discussed in a positive way with those two words in the same sentence. For the longest time, consumers did not have a choice when it came to what browser they could use. The awful, slow, and unsafe Internet Explorer browser was unchallenged in the market. Then in 2004, a hero came. That hero’s name was Mozilla Firefox, and truly for the first time the population of internet users were no longer shackled, chained and forced to use Internet Explorer.

Firefox brought security, speed, and a ton of add-ons with it. Its look and feel was easy configurable and in a very short time, it topped the #2 spot as the world’s most used browser. Internet Explorer was still in first, but when every laptop and PC in the world are being sold with that browser alone, I doubt anything will top it — even today unless the Google Chromebooks take off.

In 2008, when internet users thought it couldn’t get any better another web browser entered the market, Google Chrome. Google’s brand name is as good as it gets, and expectations were high. Entering the market after Firefox, Google has had a lot of time to study their success and build an even better browser.

After being available to the public for just a few months, no one can deny that Chrome has surpassed every single expectation set for them. Chrome’s design, level of speed, and performance are so good compared to Firefox and Internet they are jaw dropping. Who would have thought web browsers could be so exciting?

Since 2008, the fire of Firefox, who sparked the web browser revolution, has seriously fizzled out. While Chrome’s updates have made it faster, even faster and more secure, Firefox’s updates made it so slow and heavy you were forced to launch Firefox, then go get your morning coffee.

Today, Chrome has launched the beta of its newest version which is so fast – it takes us into hyperspeed (like in Star Wars). If you are part of the new generation and haven’t watched Star Wars, it is so fast and I am SO fast, that it starts loading web pages even before you are done typing the website URL.

“To get you where you want to go even faster, Chrome will now start loading some web pages in the background, even before you’ve finished typing the URL in the omnibox,” Google software engineer Dominic Hamon wrote in a blog post on the release. “If the URL auto-completes to a site you’re very likely to visit, Chrome will begin to prerender the page.”

Chrome, you are a WIN!

Download the latest’s Google Chrome  (BETA) browser.

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Target: Best Holiday Commercials

This winter season, Target took the gold for the best holiday TV commercial campaign. While typical commercials attempt to drive consumers to their doors by offering sales after sales at obnoxious volumes, Target’s commercials were joyful, catchy, fun, invoked positive emotion, and described their products extremely well.

Check out the one commercial from their campaign, and read the analysis below!

 

 

Target Holiday TV Commercial:

 

Target Audience:
80% women, between the ages of 27-45, most likely married. 20% men, married, between the ages 30-45.

Creating a successful commercial:

Step 1: Intro
0-15 seconds of commercial:

The goal of the intro is to capture the audience’s attention. Most commercials attempt to do this by blowing out your ears with a very loud intro. But this is never successful. If you want to capture your audience’s attention, you need to break away from the routine, and Target does this exceptional well. Their intro, or first scene of the commercial is certainly quiet for a commercial. The intro for this commercial was subtle enough that it engages viewers, drawing their attention to the TV screen.

Step 2: Body
15-25 seconds of commercial:

With the viewers engaged, this is the point when Target can sell their value proposition. Standard protocol in this part of a commercial is to discuss price cuts, sales, great deals. – extremely boring, dry content. Target avoided this, and instead effectively marketed their products with one of the oldest trick in the book, music! And Target didn’t use any type of music, they used one of the most popular Christmas songs ever, vital to the success of this commercial and others like it in the campaign! With the music playing in the background, the commercial smoothly transitioned between scenes, or in this case different rooms of the house. As the camera moved throughout the house, all the products available at Target were glowing as they appeared one by one in the each room. With a house full of products from Target, the target audience would have trouble thinking of what they couldn’t purchase from Target.

The commercial also did a great job of balancing the products with scenes that emulated positive emotions through the use of happy people. This addition is another vital criteria to a successful commercial. By adding the people, Target was no longer selling products, they were selling products that made people happy.

Step 3: Call to Action
25-30 seconds of commercial:

By now, any commercial should have wined and dined you, what’s left is to seal the deal through a clever “Call to Action”. Though call to actions vary from commercial to commercial, the goal is always the same: get your viewers calling you, learning more about you, or planning to visit you.

In a very creative and exciting way, Target achieved the “call to action” goal by creating the perfect slogan is: “Santa has elves, you have Target”. Genius, comparing yourself to Santa Claus….well done Target, well done.