3 Reasons This $100 Billion Company Is Relatively Cheap

Sometimes a company with a $100 billion market cap is relatively cheap, and a much smaller company can be expensive. Assuming that a large company can't produce impressive growth is just as foolish as assuming that a small company will do well just because it's small.

The truth is, each company must be judged based on its performance, not just based on its size. A prime example of this is Home Depot (NYSE: HD  ) , which might be a massive company, but if you look just at the numbers, you might think this was a small growth stock.

Up 25% and still relatively cheap?
It's amazing that a company as well-known as Home Depot could be under-appreciated, but just a couple of years ago there were rumors that this company's fast growth days could be over. With the stock up roughly 25% in the last year, investors have already been treated to excellent returns.

Some might say that Home Depot's competitor Lowe's (NYSE: LOW  ) is stuck playing from behind. Lowe's hasn't been able to keep up based on revenue or same-store sales with its more well-known competitor. In addition, Wal-Mart (NYSE: WMT  ) has slowly but surely expanded its home-improvement selection, but the company is growing fastest in the grocery space and isn't as concerned with trying to take over Home Depot's turf.

The first reason investors should consider Home Depot is that the combination of the company's 2% yield and nearly 18% annual growth that analysts expect in the next five years gives investors the best combination of total return. While some might make the argument that Lowe's 1.5% yield and slightly more than 18% annual growth expectations create an equal value, the company's results have been more inconsistent. 

While Wal-Mart has a yield of 2.5%, the company's expected earnings-per-share growth in the next few years is only expected to come in at slightly more than 9%. Given that all three companies trade for forward P/E ratios in the teens, the consistency and speed of Home Depot's growth in revenue and earnings is hard to ignore.

No comp-arison
While analysts' projections are not always correct, it's easier to compare Home Depot's comparable-store-sales growth to its peers. While Wal-Mart is the world's largest retailer, the company's expansion into grocery sales and sheer size have caused its comparable-store sales to slow.

In the most recent quarter, Wal-Mart reported same-store sales decreased domestically by 0.3%. Of course, Wal-Mart's greater size and lower exposure to faster-growing segments like home improvement and clothing have hurt the company's results. Where Lowe's and Home Depot are concerned, both benefited from an improvement in the housing industry; Lowe's performed well with a 6.2% increase in comps, but Home Depot did even better with a 7.4% increase.

Not surprisingly, Lowe's CEO Robert Niblock said, "The home improvement industry is poised for persisting growth." Voicing a similar sentiment, Frank Blake, CEO of Home Depot, said, "Our third quarter results reflect the continuing improvement in the housing market." With the tailwind of a stronger housing market behind it, Home Depot should continue to benefit and report strong comparable-store-sales growth.

Strong to the core
The third reason investors should look at Home Depot is because the company's free cash flow generation is impressive. When looking at cash flow, it makes sense to strip away some of the non-cash changes on the cash flow statement. Using core free cash flow (net income + depreciation – capital expenditures) allows investors to get a clearer look at which company is performing better.

In fact, if we compare free cash flow per dollar of sales, ranking each company fairly straightforward. A company that generates more free cash flow per dollar of sales should theoretically have more to reward shareholders through share repurchases and increased dividends.

By this measure, Wal-Mart generated $0.03 of core free cash flow per dollar of sales. While Lowe's doubled this production with $0.06 of core free cash flow, Home Depot did even better with $0.08 of cash flow per dollar of sales. With Home Depot generating 33% more relative free cash flow than Lowe's and 166% more free cash flow than Wal-Mart, to say that Home Depot is giving investors more bang for the buck is an understatement.

Great expectations
In the end, Home Depot is expected to grow faster than its peers and is delivering on this promise. Whether investors want strong same-store sales, strong free cash flow, or big earnings growth, Home Depot is king of the hill.

The company offers "more saving, more doing" to its customers. If Home Depot can continue to capitalize on the improving housing market, investors should be treated to more yield, more growth in the future.

Who else is taking down Wal-Mart?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

 


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