Home Depot Is Building on a Strong Foundation
After many false starts, the recovery in the housing market looks to be real this time. And that makes Home Depot (NYSE:HD), the nation’s largest home-improvement retailer, almost too obvious an idea. After all, when everyone is chasing the same trade or investment, it’s often too late to find value.
But there looks to be plenty more upside ahead with Home Depot, despite the eye-popping 46% gain year-to-date (vs. 8% for the S&P 500).
Yes, housing has finally gone from being an anchor to an assist for Home Depot. But equally important is that the retailer is better able to capitalize on that housing tailwind now that it’s wrung greater efficiencies out of its supply chain and product mix.
Not only are sales and same-store sales expanding smartly against some tough year-ago comparisons, but more of those sales dollars are finding their way to the bottom line.
Indeed, over the past four years, Home Depot’s operating margins have expanded to about 10% from 6%, according to James Ragan, an analyst at Crowell Weedon, who rates share at “buy.” Those fatter margins have added approximately $3 billion a year to operating income.
True, with a forward price-to-earnings ratio of 18, shares trade at a premium to their own five-year average of 17, according to data from Thomson Reuters Stock Reports. But then the housing market tanked in 2006 and the market wasn’t exactly willing to pay up for a home-improvement retailer over that span.
That looks like it’s about to change.
“In our opinion, HD’s leading market position, dominant margin performance, and ability to benefit from a housing recovery can drive higher multiples,” says Ragan in a new note to clients.
His peers agree. Analysts’ median price target stands at $69. Add in the 1.8% yield on the dividend, and Home Depot’s stock has an implied upside of 14% in the next 12 months or so.