HD Stock Worth Building Something With

The Home Depot (NYSE:HD) is the largest home improvement retailer. HD stock is viewed as an important tell on several marquee economic data points, including consumer-related and housing numbers.

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Home Depot stock is the second-largest component in the Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) behind a company called Amazon (NASDAQ:AMZN). However, Home Depot is a mature consumer cyclical name. As such, it’s not as volatile nor as richly valued as some of the growth-ier names in this sector. HD stock trades for less than 19x forward earnings.

Up 21.89% year-to-date, Home Depot stock has been one of the steadier members of the Dow Jones Industrial Average, a theme that should continue because the company is not one at the epicenter of the trade tensions between the U.S. and China.

Last month, Guggenheim analyst Steven Forbes noted of HD stock price “that while the shares might seem pricey after their 2019 run, he thinks that same-store sales will increase in the second half of the year, bolstered by strategic investments in the business, giving the rally fresh legs,” according to Barron’s.

The company reports earnings on Tuesday, Aug. 20 with analysts expecting earnings of $3.09 per share, up from $3.05 a year earlier.

A Winner in a Shifting Retail Environment

As has been widely noted, the retail industry is experiencing a revolution, one that is likely to result in more store closures over the coming years. That doesn’t mean all brick-and-mortar stores will disappear, but the trends at a play in the retail space will ensure the physical stores that remain will likely be those of stronger companies. For a variety of reasons, Home Depot will be one of the remainders (and winners) as retail undergoes a major face-lift.

“Other catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (like commercial),” said Morningstar in a recent note. “Expansion of both new (like textiles from the Company Store acquisition) and existing (appliances could grow post-Sears bankruptcy) categories could also drive demand.”

Home Depot is also a wide-moat company, meaning it poses significant barriers to entry to would-be rivals. Lowes’s (NYSE:LOW) is HD stock’s big primary competitor, but it hasn’t been much of a competition in terms of price action. Over the past five years, Home Depot stock is up more than 150% while Lowe’s is higher by just 100%, according to Bloomberg data.

Over that same period, HD stock has beaten XLY by a margin of more than 2-to-1, indicating that it has been one of the best large-cap consumer discretionary names not called Amazon over that span.

Bottom Line on HD Stock

Past performance is never a guarantee of future returns, but Home Depot stock can continue being a long-term winner because of the company’s excellence in execution, pricing power, wide moat and resilience in the face of rising online retail sales.

“Home improvement retailers remain one of the best-insulated sectors from e-commerce threats, as the high weight/value ratio of many products prohibit cost-effective shipping and the specialized knowledge base employees offer is difficult to replicate,” said Morningstar. “These strengths have helped Home Depot deliver adjusted average returns on invested capital of 31% during the past five years, after the last housing downturn and focusing on its core orange box business.”

Yes, Home Depot stock is a tad pricey right now, but if its management can boost margins and return on invested capital, the HD stock price may grow into that valuation, muting the expensive nature of it.

Todd Shriber doesn’t own any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/home-depot-stock-is-slightly-expensive-but-it-may-warrant-that-multiple/.

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