It's A Number Game: How Can You Not Like Home Depot?
Summary
- Home Depot's revenue has increased about 6%/year for the last four years.
- They've expanded their operating and net margins.
- They are throwing off billions in cash which they are returning to shareholders as dividends and buybacks.
'Securities Analysis' by Graham and Dodd remains one of my all-time favorite investment books. While I have long given up on the “find a stock trading below book value and wait for the market to catch-up” strategy, I remain a fan of the book’s central idea that an investor can ascertain a great deal of information by tearing apart the company’s financials. “It’s a numbers game” columns are devoted to primarily using financial statements as a way to discern the underlying value of a company
Home Depot (NYSE:HD) is the largest home improvement store by market cap, which is $212 billion. Lowe's (LOW) is the next largest at $75 billion. There are only five stores in this sector. HD is the second cheapest on a PE basis (24.64) and second cheapest on a forward PE basis (17.83). They have the second-highest dividend, which is currently yielding 2.26%. They have increased their dividend for the last five years.
While the sector is up over the last year, it is currently in a downtrend:
This section of the retail market is entirely dependent on the real estate market: if houses are selling, then people are improving them. Right now, the US real estate market is in good shape:
The chart above has new and existing home sales converted to a base 100, with the last month of the last recession equaling 100. The existing home sales market (in blue) is moving sideways right now. This is not for lack of demand but declining supply:
The months of available supply has been in a downtrend for the last five years. New home sales (in red), however, continue to increase. And the increasing mortgage application rate indicates that trend should continue (the table is from Calculated Risk):
Finally, according to the Census Bureau, sales at home building supply stores are increasing:
The chart on the left plots the absolute number, which is in the middle of a five-year uptrend. The chart on the right converts that data to a Y/Y basis, which has been fluctuating between 2.5% and 10% for the last five years.
The following table shows HD's relevant income statement and efficiency ratios (data from Morningstar.com; author's calculations):
It doesn't get much better than this. Revenue is growing between 5.5%-6.5%/year, which is an amazing pace for a company this size. The gross margin has been stable. The company has been cutting overhead, which has led to the nearly 400BP decline in their SGA/revenue ratio. As a result, the company's operating margin increased nearly as much. Their net margin rose as well. They have slightly increased their inventory turnover, which has decreased their days of inventory on hand. The only problem is their receivables numbers; there's been a decrease there with a modest increase in the days of receivables. However, increasing outstanding receivables by a single day isn't concerning.
By way of comparison, here the basic income statement numbers for HDs main competitor, Lowe's (data from Morningstar; author's calculations):
Lowe's has the same gross margin, but HD beats Lowe's hands down in the operating and net margin. The competition isn't even close.
Let's turn to a truncated version of their cash flow statement:
The top line shows the total cash available from the company after accounting for cash from operations and investment. That figure has been positive for the last five years. In fact, the company has been throwing billions of free cash flow. This has allowed them to repurchase stock (which not only helps to bolster the stock price but also provides treasury stock for acquisitions), pay dividends and float debt at cheap rates.
These are fantastic numbers, making Home Depot a very attractive investment opportunity.
This post is not an offer to buy or sell this security. It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.
This article was written by
Analyst’s Disclosure: I am/we are long HD. 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.
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Comments (33)
The trend will deflate one of these days. Today, the JP Morgan co-president warned of a coming deep correction.
