Home Depot: Poised For Growth In A Low Interest Rate Economy

| About: Home Depot, (HD)

Summary

Historically low interest rates will drive home sales, which will boost spending on building materials for new home construction and home renovations.

Net earnings for Q1 of 2016 were up $200 million compared to Q1 of 2015.

Shifting strategy to online sales has kept Home Depot in a position to remain a key market player in the home improvement retail market.

Improving logistics software will reduce spending on warehouse operations and will lower time spent on the delivery-to-shelf process.

Company Overview

Home Depot, Inc. (NYSE:HD) is a home improvement retailer that sells home products, building materials, and professional installation services through its 2,275 retail stores and through its website. The company caters to customers who do work on their own (DIY), to customers who purchase materials for third parties to complete, and to professional customers who rely on the company for supply of materials. In 2015, Home Depot saw revenue of $88.5 billion, and currently has about 385,000 employees.

Housing Trends

With the demand for homes at a healthy level and with forecasts of home prices set to rise 3% in 2016, there are many reasons for people to want to improve upon their homes in hopes of selling at a high price. Interest rates in the United States remain low, and with global market fears caused by the Brexit, it is highly unlikely that the Fed will raise interest rates in the near future, meaning more applications for home mortgages are likely. The supply side of the equation though is a different story: less people are putting their homes up for sale and new home construction remains sluggish. With consumers being careful about their finances, spending isn't where it used to be, but when consumer confidence in the economy picks up (it eventually has to), there is likely to be an upward shift in the supply market of homes. This would mean going long on Home Depot now in preparation of this positive housing trend means capturing gains you couldn't if you go long at a later date.

Financials

Home Depot is currently priced at $133 a share, a 19% increase from $111 a year-ago period. Sales increased 9% in Q1 of 2016 compared to Q1 of 2015, and analysts predict earnings per share to hover around $6.31 for the year 2016. Home Depot's closest competitor, Lowe's (NYSE:LOW), is at a price to earnings ratio of 27, while Home Depot is at a price to earnings ratio of 23. Though the difference is slight, it might suggest that Home Depot is undervalued. With net income steadily increasing since 2012, the company is poised to reach its 2018 revenue goal it revealed in its 2016 annual shareholder meeting: $101 billion.

Shifting Strategy

The trend with brick-and-mortar stores is that less is being bought in them and that more is being bought online, a clear conclusion that can be drawn from the recent disappointing numbers of traditional retail clothing stores. One must consider with Home Depot that even though its website lists about 1 million products compared with more than 30,000 in-store, people in the market for home improvement still prefer to shop for the materials in-store for purpose of measurement, quality feel, and the need to meet construction deadlines as opposed to waiting for the shipping of materials. Regardless, Home Depot has invested about $300 million in its e-commerce capabilities, hopes to reduce shipping times to 2 days, and saw sales increase online. All point to a strategy in which the company aims to keep in line with consumer trends.

Logistics

The efficiency in distributing goods is crucial to a home improvement retailer, which is why Home Depot's investment in supply chain software is a critical factor that reduces operating costs, something of benefit to shareholders. With the software launch, employees will be able to more efficiently move supply from trucks into receiving areas and then onto shelves. Being able to replace inventory on time is important for in-store customers and since Home Depot is hoping to scale the software across its stores, big savings are likely.

Conclusion

With macroeconomic trends adding positive aspects for going long on Home Depot, in addition to the company's goal of 5-7 new stores a year, it plans on continuing to be the market leader in the home improvement retail market - Lowe's only has about 1,857 stores and lacks the economies of scale that Home Depot has. Additionally, Lowe's has historically struggled against Home Depot in terms of profit and sales. No other home improvement retailer comes close to the revenue that Home Depot or Lowe's generates, but with Home Depot's target of about 4.7% CAGR sales growth by 2018, and further expansion into Mexico and Canada, going long on the company will go far.

Disclosure: I/we 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.