Should I Buy Home Depot? 3 Pros, 3 Cons

by Tom Taulli | August 14, 2012 12:24 pm

Should I Buy Home Depot? 3 Pros, 3 Cons

In its second-quarter, sales at Home Depot[1] (NYSE:HD[2]) were a bit light. They rose about 1.7% to $20.57 billion. But the company was still able to produce standout earnings, which came to $1.53 billion, or $1.01 a share. The Wall Street consensus was for 97 cents.

In fact, Home Depot’s shares hit a 52-week high today to $54.44. For the year, their return is an impressive 29%.

Yet can the company keep things up? Or might there be some weakness in the offing? To see, here’s a look at the pros and cons:

Pros

Retailing Powerhouse. Home Depot is the world’s largest home improvement retailer, with over 2,200 locations. A key to the company’s success has been its focus on customer service. Employees tend to have better-than-average compensation and also get ongoing training.

Another key is that Home Depot continues to offer exclusive products with marquee brands, like Defiant, Everbilt, and Hampton Bay.

Online. E-commerce rivals, such as Amazon (NASDAQ:AMZN[3]), are not a big threat to Home Depot. After all, the company deals in many heavy products, which often require some expertise. Yet Home Depot still realizes there are huge advantages to building a strong digital business. To this end, it has greatly improved its website, implemented in-store payments with eBay’s (NASDAQ:EBAY[4]) PayPal and has launched a program called Buy Online, Pick-up In Store, which is a great convenience for customers.

Supply Chain. Home Depot has been devoting tremendous resources to improving this infrastructure. The company now has a Rapid Deployment Center, which centralizes the supply chain.  And yes, this has been a factor in generating cost savings.

Cons

Market Expansion. The U.S. home improvement market is fairly saturated. So to find growth, Home Depot will need to invest heavily in foreign markets. But this can be risky because of complex regulations and the expenses of setting up operations.

Housing. It has been one of the few bright spots in 2012. Yet the activity is still fairly muted. What’s more, if the macroeconomy continues to weaken, it could be a problem for the real estate market.

Competition. Home Depot must deal with many local rival retailers. Of course, larger players like Lowe’s (NYSE:LOW[5]) are always adding to the competitive pressure.

Verdict

While the growth in the U.S. will be slow — because of the saturation levels — Home Depot still has lots of potential. Its efforts to realize more efficiencies will be a major boost. What’s more, the company is leveraging its footprint into foreign markets, such as in Mexico and China.

But the valuation is pricey, coming to about 20 times earnings, and the dividend yield is only 2.2%. So, investors may want to wait to get a better price. In other words, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[6], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[7] and “All About Commodities.”[8] Follow him on Twitter at @ttaulli[9]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. second-quarter, sales at Home Depot: http://investorplace.com/2012/08/home-depot-profit-rises-on-better-u-s-sales/
  2. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  5. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  6. IPOPlaybook: http://investorplace.com/ipo-playbook/
  7. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  8. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  9. @ttaulli: https://twitter.com/ttaulli

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