The Home Depot (NYSE:HD) is the nation's largest home improvement and construction retailer with 35 years' experience. Founded in 1978 by Bernie Marcus and Arthur Blank, the company has quickly turned into one of the biggest centers for home improvement shopping, and still promises growth. Its share price moved more than 29% last year, from $63.48 per share to more than $82 per share.
Home Depot operates in the home improvement industry. The industry was hit hard through the recession starting in 2007. As consumers lost their jobs and economic uncertainty loomed, investment in home remodeling and building was significantly reduced. Since the recovery of the global recession, the industry has seen increasing levels of growth and profitability. The housing market is recovering that will play a large role in the future success of the company. Home remodeling spending in the United States is expected to increase 6.8% in 2014 and 7% in 2015. In pure revenue terms, remodeling spending is expected to grow from $293 billion in 2013 to $383.7 billion by 2018.
New home construction and re-sales are both key revenue drivers for Home Depot. Total U.S. construction starts will rise 9% to $555.3 billion in 2014, which will positively impact sales for the company. Single family and multi family housing will grow 26% and 11% in dollars, respectively. U.S. existing home sales are expected to rise from 4.66 million units in 2012 to 5.60 million units in 2014. Growing existing home sales will improve the company's top line. Home Depot's management estimates that each sale of a used home creates a revenue opportunity of approximately $3,500 as people often repair their houses before putting them on sale.
Home Depot has continued to fuel its growth through expanding its geographic reach. The company is expanding its operations in Mexico, which is emerging as a fertile and important market for Home Depot and the home improvement industry generally. Between 2010 and 2040, the country is expected to add 14.6 million new homes, which represents a significant opportunity for growth.
With few direct competitors found within the highly fragmented home improvement industry, Home Depot has differentiated its stores by offering several unique formats to accommodate the needs and interests of customers while offering products at a cost lower than the premium price customers are willing to pay. With low switching costs to customers, Lowe's (NYSE:LOW) is Home Depot's main rival within the industry. Both Home Depot and Lowe's are profitable companies that seem to have good years together and decline together. Some of the key statistics for Home Depot and Lowe's are given below.
Return on Assets
Return on Equity
The chart represents that Home Depot's stats are almost as good or better than Lowe's. Home Depot's operating margin and return on assets percentage is much higher than its competitor. Higher return on assets means the company is more efficiently using its assets which is a sign of great management. Another important metric is return on equity. Home Depot's return on equity is almost twice than Lowe's, which means it makes more profit than Lowe's with the money that you invest.
Total debt/equity ratio of Home Depot is a bit higher than Lowe's, but this is not alarming as Home Depot has a significant cash figure in its balance sheet. Looking at the Price/Earnings ratio, Home Depot is trading at a discount in comparison to Lowe's.
Another good reason to invest in the stock is because dividends increased from $0.225/stock in 2009 to $0.39/stock in 2013, suggesting that Home Depot will have a brighter future. The company has consistently returned value to its shareholders through cash dividends and share buybacks. Despite the financial crisis and recession, it was able to maintain a healthy dividend payout. With $4.85 billion in cash, it has the ability to pay dividends for at least four years.
Home Depot appears to be a solid company that has recorded good performance in past years. As the housing market is recovering, the company is well positioned to enjoy continued success in the years to come. The growing presence in Mexico will increase its market share and the bottom line. Home Depot's strong leadership, advanced strategies and sound financials ensure that this company has a successful future ahead. In my opinion, Home Depot is a fantastic opportunity for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.