After a rousing five-year growth trajectory that has taken Home Depot (HD), the world’s largest home improvement retailer, to all-time highs is “Can this continue?”
After solid earnings again this week, I say it can, and I recommend that you buy Home Depot stock to hold for a very, very long time.
Home Depot Stock – High, Low, then High Again
As the housing market went from boom to bust in the middle of the last decade, HD stock tanked. From a high of $34.85 in 2006, Home Depot stock shed more than half its value, falling to a low of $15.73 in October 2008. Over that full three-year period, the stock generated a negative annual total return of 15.5%.
But with the official end of the recession in 2009 and the return of the real estate market, Home Depot stock came roaring back. For the five years ending in calendar year 2013, the stock generated a cumulative total return of more than 300%, for an annual average of 32.7%, outpacing yearly returns for the S&P 500 by roughly 15 percentage points.
Underlying that performance has been strong financial management. While revenues grew over that same five-year period at an average of 3.6% a year, to $78.2 billion in the last full fiscal year, net income grew six times as fast, at a blistering 21% pace.
The results reflect the strategy senior management adopted in the midst of the financial crisis to controlling costs and finding efficiencies in all operations — a strategy senior management continues to follow. As a result, Home Depot profitability has more than doubled, from 3.2% of revenues in fiscal 2009 to 6.8% last year, and free cash flow has grown at an average of nearly 19% a year.
The strategy has enabled Home Depot stock to deliver shareholder value through stock buybacks and dividend increases. Last year, the company repurchased $8.5 billion of stock, and plans to buy another $5 billion this year. Meanwhile, its annual dividends have grown 15% per yearduring the past five years.
Home Depot stock has shed its former goal of rapidly expanding the number of its warehouse stores in favor growing store profits and gaining market share. One tactic is smart price discounting: Rather than compete with Lowe’s (LOW), its chief rival, on prices across the board, HD stock is focused in discounting specific product lines — like power tools — to draw customers in, and make up the margins on selling additional goods and services.
At the same time, HD now pays store managers bonuses on the basis of gains in sales revenue, profitability and inventory turnover.
Earnings show how it all is paying off.
- For Q2, HD stock earned $1.52 a share, up 22%, and beating the estimates of $1.45 a share. Revenue was up 5.7% to $23.8 billion.
- Comparable-store sales increased an impressive 5.8%, of which U.S. comps were up 6.4%.
- HD also has moved effectively into the online space, and online sales blasted up 38%.
- Home Depot also revised its earnings upward, with FY14 now expected to grow 20% to $4.52.
At a price of $88.23, HD stock is trading at 19.5 times FY 2014’s estimated earnings. It also pays a decent (though not impressive) dividend of $1.88 annually, or 2.1%. Meanwhile, long-term earnings are projected at 16% a year over the next five years.
Combine all that with the fact that what Home Depot does — allowing homeowners to either improve what they’ve got for their own uses, or make their houses more marketable when they’re ready to sell — and Home Depot stock looks very attractive for both retirement and regular portfolios.
After performing this analysis, I’ve decided to add HD stock to my own retirement portfolio.
As of this writing, Lawrence Meyers did not hold any of the aforementioned securities, but planned to purchase HD within 72 hours. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.