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It's A Number Game: How Can You Not Like Home Depot?

Hale Stewart profile picture
Hale Stewart


  • 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

This article was written by

Hale Stewart profile picture
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (33)

somedata1 profile picture
Home Depot maybe shamefully overpriced a little???
I go to Home Depot to buy parts for the toilet. The guy in the dept gave me good advise and it fixed the old girl. My mistake was having them make 2 new keys for me, both didn't work in the lock.
Actually I meant to say ‘not’ for International expansion. Focus more on organic growth.
Their focus has been on line sales having opened 3-4 near 1.5M sqft distribution centers across the country. I’ve gotten fairly quick delivery on lots of products up to a bathroom vanity with granite top.

Great customer service folks to as they jumped right on replacement of a broken granite backsplash on bath vanity. Any other minor issues I handled at one of the 3 stores within 2-5 miles. 3rd largest holding with nice yearly dividend increases!
sfpdf profile picture
I'm not a fan of consumer discretionary--I think that AMZN is going to obliterate large swaths of this sector, and AMZN is priced unconscionably for my tastes--but I do try to have a relatively diverse portfolio and like decent dividends, especially when a company has been a regular and above market increaser, as HD has, so this has hit my radar recently. Its PEG looks quite reasonable compared to both recent and expected numbers, not to mention the overall market,and I'm not super worried in the short run that rate increases will bite badly (compare where rates are at and expected to go in the next year or so to where they for during the years of the housing boom of the 00's). I appreciate VI99's use of other valuation metrics, but in terms of book value, my view has always been that a stock at high price to book or high price to sales just means it's more efficient (one of my largest holdings is FB, which trades at a reasonable PEG but a dizzying p/s and p/b). The incurrence of LT debt is worth looking at, as buying growth, especially in an increasing interest rate environment, can be a concern. One of the things I'd like to know more about before investing is the company's international plans; it seems to me that while HD's market is *relatively* safe from AMZN incursion, it should be reaching something close to saturation in the US. Does anyone know how many stores/countries its operating in and what its plans are in the near future in these regards?
One of the things most of the pundits get wrong in regard to HD is that they try to compare housing prices or even housing starts to get an idea of sales growth. The primary metric is private residential fixed investment metric. Although starts and overall prices do have some correlation, there are key disconnects between the first two items and the fixed investment metric. Beyond that, it's important to note that LOW and HD are essentially duopolies in the channel. Thus far, AMZN has not managed to make any meaningful inroads. Unless they buy a Menards or Lowes, I doubt they'll be able to do a good job of it. Also important to note, HD wisely stopped investing in new stores 10 years ago. They (correctly) realized that new stores were no longer key to growth. HD has been buying other sales channels very quietly though. The company store, interline brands, blinds.com, etc are all key to taking advantage of new markets for them. Breaking into multi-family MRO, digital sales, and multi-channel are what HD is focusing on going forward. The funny part is that HD is doing a much better job of adding "profitable" sales to the topline vs Amazon's growth. After all, HD isn't getting a pass on profits like Amazon has been so far.
I would look for HD to be a big player in International expansion. They have more stores that could be added in Mexico (and the Caribbean) and would not be surprised to see migration to Central America. They were in South America in the late 90’s and withdrew because of the instability in the economies and government.
Indeed. Plus, they have a good store in the Conch Republic. I've visited it many times.
somedata1 profile picture
Home Depot, Inc is a wonderful company. I'm long and planning to hold for the rest of my life and more. They just announced 14.7% dividend raise. That's a sign that the business is doing well and the board has confidence in the company. If it falls to $150/share, I will add more shares. Regarding U.S. corporate tax cut, this is one of the handful U.S. only businesses (Mighty Altria Group being another) that will benefited from it greatly. Long Home Depot, Inc and United States.
Hot Blubber profile picture
Amazon just tendered an offer for Lowes. Ha, ha!
valuinvstr99 profile picture
No mention or analysis of price/book value ~143x [~5x industry average] or extremely high leverage [LT debt/equity at ~17x and debt/capital at .94]. And, price/FCF > 20x [also noted by normbay above]. Including a discussion of the leverage, P/BV, and P/FCF would balance the investment thesis. Since price is what you pay and value is what you get, a discussion of fair value is instrumental to the investment decision. The author concludes that the stock is cheap based on several fundamental metrics [mostly based on historical performance] without providing compelling forward looking substantiation. My concern is that initiating a position at the current price may not provide a satisfactory long term risk adjusted return.
It's never been 'cheap' by any of those metrics historically. Not even in 2009. That's the trouble with being a value investor these days. Unless long rates get to 1982 levels, I think you'll be disappointed with the price of anything.
valuinvstr99 profile picture
You hit the dilemma nail on the head! I am finding it all but impossible to find stocks to buy. As a value investor, I am wedged between buying well in excess of fair value with the likelihood of low long-term returns and continuing to watch the market auction continue to drive up prices. I will not overpay just to get into the game. Buffett sits on $116B in cash because stocks are overpriced.
The trend will deflate one of these days. Today, the JP Morgan co-president warned of a coming deep correction.
We'll see. I think it helps to view asset prices (all assets, not just stocks) in the context of where rates could 'reasonably' go. The total amount of debt in the world today vs the 1970s is very different. I think that probably caps rates from normalizing too much. It definitely caps rates from going back to early 1980s levels. In that context, it probably makes sense to come to terms with over-paying (a little) for assets like stocks.
dunnhaupt profile picture
Annual revenues, profits, and dividends of HD have risen regular as clockwork for many years. You simply can't do better than that. They also doing a huge buyback right now.
Beatgirl99 profile picture
Tremendous buying opportunity here. Long HD.
Pianodude profile picture
I added on the dip.
I am a Lowes fan shopping wise. Prefer it over HD. JMHO! As an investment, I own neither. Really like the 10% veterans discount at LOWES.
Buyandhold 2012 profile picture
Home Depot has been an excellent investment over the long term. Two cents a share on a price adjusted basis in 1981. Now look how high it is.
Home Depot is part of our culture. Electricians, plumbers, etc., go there everyday when they need something quick. It's the go to place for DIY'ers and do it for me folks. Home Depot is a first class stock.
normbay profile picture
First class company, Paul. Price determines if it is currently a first class stock!
But that's the problem. If it ever gets "cheap" enough based on standard metrics, then you might not want to buy it, as it got there for a reason (i.e. Amazon coming into the space more aggressively or some other existential threat to the pricing power). When everything is humming along, it never really gets cheap enough to justify an entry based only on things like price to book or price to FCF. That's almost true to every stock out there. Value investors are, unfortunately, stuck waiting on the 1981 rate environment to pick up "cheap" shares. Good luck with that.
normbay profile picture
Operating numbers are good, but value isn’t, at more than 20X cash flow
Vs apple 3x cash
You need to look what will happen one year from now, after 4 rate increases.
After 4 increases people still need a place to live in, people still need to go to HD to buy stuff to fix or improve their homes. The world doesn't end after 4 increases.
90% can be bought on Amzn wo dealing w the non-existent sickening hd customer service. Go to hd, ask for help, hear echos

Not a long term investment at this point
Amazon, literally, has no customer service...at all.
mango_man profile picture
Jeff Bezos can’t help me if I need a box of 3-1/2” galvanized lag bolts, a couple of 12’ pressure-treated 2x4’s and two bags of cement.
southernsanta profile picture
100% can be bought at homedepot.com
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