Even though Home Depot Inc (NYSE:HD) has been around since the late 1970s, the company seems more like a red-hot startup. Just look at the performance on Wall Street.
For the year so far, HD stock is up a sizzling 42%. Note that this exceeds the returns for companies like Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT).
Now it’s true that there are some issues. HD stock sports an expensive multiple, which is currently at 26.5 times earnings. By comparison, rival Lowe’s Companies Inc. (NYSE:LOW) trades at 22X.
And as InvestorPlace.com writers like Vince Martin and Lawrence Meyers have pointed out, there are other potential land mines.
For example, Home Depot is in a cyclical business. As seen during the financial crisis, there can be a serious impact on the stock price when the housing market implodes.
Granted, a repeat of this does seem kind of a stretch. But then again, it is nonetheless a good bet that the Federal Reserve will continue to raise interest rates. This will put more pressure on housing purchases as well as spending on high-ticket items.
So what should investors do? Well, I think the bull case is still intact, as the company should benefit from several major trends. Let’s take a look.
The Pros on Home Depot Stock
Home Depot is the world’s largest home improvement retailer, with more than 2,200 stores in the U.S., Canada and Mexico. The scale means that the company can achieve a low-lost structure but also gain access to a wide assortment of products (there are over 35,000 products in each location). Such advantages are extremely tough to replicate.
While Home Depot is not necessarily immune from Amazon.com, Inc. (NASDAQ:AMZN) challenges, the company is still one of the best positioned to manage through the wrenching changes of the digital revolution.
Let’s face it, the typical weight of a product makes it often inconvenient for delivery. Home Depot also has the benefit of thousands of well-trained associates that can provide value-added advice on a broad range of topics.
Yet the company has not been a laggard with its online efforts either. Over the years, it has made significant investments in developing an omnichannel platform. In fact, Home Depot has recently indicated that it will spend an additional $5.4 billion on improving the systems over the next three years.
Now another key part of the bull case is that the secular trends continue to look promising. According to Edward Jones analyst Robin Diedrich, the market for HD stock is likely to grow at an impressive 10% per year for the long haul. She notes:
“[W]e expect home improvement spending to grow at an above-average rate versus retail sales overall, given improving expectations for new household formation, the reversing of pent-up demand caused during the recession, the replacement of the aging housing base, and lifestyle trends that favor more and larger kitchens and baths in the home.”
And the runway is still significant for HD stock. Here’ what CEO Craig Menear had to say:
“We are investing not only to protect our position, but we are investing to leverage our scale. The products and services are still a small part of a $600 billion addressable market. Our market includes home improvement products and services and MRO or maintenance, repair and operations products.”
Bottom Line on HD stock
Even though HD stock is not cheap, the valuation is also not out of whack. Given that the company has a strong moat, steady growth and the benefit of secular tailwinds, there really should be a premium multiple. It is also helpful that HD has recently put in a plan for up to $15 billion in buybacks.
Going forward, it’s probably not realistic to expect the same kinds of returns generated this year. However, even if the equities markets get rockier, which they inevitably will, Home Depot stock has a good chance of holding up, as investors will likely prefer those kinds of blue chip companies that have demonstrated durability.
— Tom Taulli[ad#IPM-article]
Source: Investor Place