An uptick in the housing market, market-share gains at the expense of struggling Sears, and substantial supply-chain improvements could be the catalysts for a near-25% rise in Home Depot (HD) over the next year, writes Avi Salzman in a Barron's cover story.
The stock price is up just 6% Y/Y, sharply lagging both the S&P 500 and Lowe's (LOW). Its 17.4x P/E ratio slightly trails that of Lowe's despite more impressive earnings. As Lowe's has relied on promotions and new stores in the years following the housing bust, Home Depot - under the leadership of Frank Blake who came to the CEO spot just ahead of crash - has moved to cut costs, close underperforming units, and improve customer service, and since mid-2009 has consistently posted same-store sales gains higher than Lowe's. In 2013, comp-store sales grew 6.8% at HD, the best print since 1999.
Home Depot has the best management team in the business, says Credit Suisse's Gary Balter, and ROE has shot up to 35.5% - roughly twice that of competitors - from 22.2% when Blake took over and began reorganizing the supply chain.