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Home Depot Set to Outperform Amid a Housing Market Recovery
Posted by: Damian Illia (IP Logged)
Date: December 13, 2013 05:12PM

Few large-cap companies can offer above average long-term growth rates. However, there are still a few that can provide this to investors. Home Depot (HD), the world's largest home-improvement retailer, certainly looks like one of these cases, especially as the housing market and prices continue to improve. Although it market cap reaches almost $112 billion, analysts expect it to deliver average annual EPS growth rates around 17% to 18% over the next five years (compared to an industry average of 12% to 13%).

And not only analysts like Home Depot. Several prominent investors have also upped their long positions in the stock. Among them we can count Lee Ainslie (Maverick Capital), who increased his holdings by 120% over the last quarter. Similar is the case of Caxton Associates – which boosted its position by 175% – and of Jim Simons, who added 91%. Even more bullish were Joel Greenblatt and Paul Tudor Jones who augmented their stakes by 202% and 337%, respectively.

Image: HomeDepot.com

With both hedge funds and analysts betting on Home Depot’s growth, is it time to buy and hold?

Is Home Depot Still a Growth Story?

Home Depot was, for decades, an aggressive growth story. However, over the past few years, this changed: Macro headwinds forced the company to change its business model. In six years it sold its professional supply business, and closed its retail operations in China, and all of its ancillary retail businesses (around the world).

Currently, Home Depot´s focus is completely put on its core business, home improvement retail stores (aka orange boxes). This should help increase productivity and improve its supply chain. In fact, the management has proven committed with these goals, and results should soon be reflected on the firm´s margins.

Moreover, as the U.S. market recovers, analysts expect Home Depot to assert its position as the segment leader, increasing its market share and, subsequently, its sales and margins (once again). A “cross-selling strategy, improved merchandising technology, and further penetration of selected customer product segments (like commercial)” (Morningstar) should also be key drivers of the retailer´s its top-line growth.

Shareholder-Friendly Policies

Home Depot is known among investors for keeping its shareholders happy. Each year, the company returns billions to stockholders through dividends and share repurchase plans. Currently, the dividend yield stands at 1.99% of the stock price. Its closest competitor, Lowe´s Companies (LOW) will pay about 1.54% of the current stock price in the form of dividends.

Stock repurchase programs have also been highly beneficial for stockholders. Home Depot reduced the number of shares by 31% over the past six years. In comparison, Lowe´s cut back the number of outstanding shares by 32% over the same time period.

Valuation

Although Home Depot´s stock price rose more than 27% since the beginning of the year, its valuation still looks pretty reasonable, especially when its above average EPS growth projections are taken into account. Shares trade at 21.3 times the company´s earnings, compared to the home improvement stores industry median of 18.4x P/E. Nonetheless, Home Depot still trades at a discount in relation to Lowe´s 22.4x P/E, although growth estimates for the years to come are quite similar.

Finally, there is one very important metric to consider: return on equity (ROE). In this category, Home Depot widely outperforms its peers; with an ROE of 25.5%, it comfortably surpasses Lowe´s 14.1% and its industry median of 9%. This means that the company usually makes more profit than its competitors with the money that you invest.

Bottom Line

Home Depot offers compelling growth prospects, a clear business model and a reasonable stock valuation. Gurus have been betting on this company lately, but also on its exemplary management team. I believe it is time to trail the hedge fund band: Buy and hold, and enjoy the dividends in the meantime.

Disclosure: Damian Illia holds no position in any stocks mentioned.



Guru Discussed: Caxton Associates: Current Portfolio, Stock Picks
Jim Simons: Current Portfolio, Stock Picks
Stocks Discussed: HD, LOW,
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