Home Depot, Tractor Supply, and WD-40: 3 Practical Investment Ideas

Looking at practical needs such as supplies for your home or recreational farm can provide investment ideas for your watchlist.

Jan 22, 2014 at 6:30PM

Looking toward your home, farm, and repair needs represents one of the ways you can get investment ideas. For example, lumber for your new deck can come from big-box retail chains such as Home Depot (NYSE:HD), or the hay for your small hobby farm can originate from recreational farm supply retailer Tractor Supply (NASDAQ:TSCO). You might also use WD-40's (NASDAQ:WDFC) products to fix that squeaky garage door.

Big Orange
The recent housing recovery and improvement in the national economy has served as a huge boon to Home Depot as consumers flock to its stores to purchase supplies for the purpose of building a new home or repairing an old one. Home Depot grew its year-to-date revenue and free cash flow an impressive 8% and 12%, respectively. The number of customer transactions and average ticket sales each increased 4% during that same time frame.

Balance sheet-wise, Home Depot remains in solid shape, with cash comprising 34% of stockholders' equity and giving the company some financial flexibility in expansion and capital returns in the form of dividends and share buybacks. Long-term debt-to-equity resides in the high range, clocking in at 103% of stockholders' equity; however, its operating income still exceeds interest expense by 26 times. The general rule of safety resides at five or more times. So far this year, Home Depot paid out 34% of its free cash flow in dividends amounting to $1.56 per share annually, yielding 1.9%.

For your hobby farm
Tractor Supply is sort of a Sam's Club for people who want to operate small-scale ranches and farms as a hobby. It sells all sorts of supplies from live ducks and chickens to hay and cow-feeding devices. Livestock and pet supplies made up 45% of its year-to-date revenue followed by "Hardware, Tools, and Truck," which came in at 22% of revenue.  Tractor Supply grew its year-to-date revenue 11%; however, its free cash flow clocked in at negative $58 million, mainly due to increased capital expenditures into its distribution system.

You may want to keep an eye on its relatively low cash balance of $46 million, which only represents 4% of stockholder's equity. Tractor Supply pays a small $0.52-per-share annual dividend, equating to a 0.70% dividend yield.

Put some WD-40 on it
The name "WD-40" represents the cure-all to dislodge some stuck widget or quiet a certain annoying squeaky mechanical noise. The company behind WD-40 also sells other household items, such as 2000 Flushes toilet cleaner, Lava hand soap, and Carpet Fresh; however, the main focus of the company lies with its flagship lubricant spray. It also sells a WD-40 specialist product line that includes a rust release penetrant spray, rust remover soak, and protective white lithium grease.

In its most recent quarter, WD-40's revenue remained largely even, while free cash flow declined 63% due to increased capital expenditures and timing of accounting accruals. The multipurpose products maintenance segment kept its overall revenue from declining, with the segment growing 3% in the most recent quarter. By contrast, WD-40's "harvest" segment, which includes home care and cleaning products, served as a drag on revenue, declining 15% in the most recent quarter.

According to fellow Fool Michael Lewis, WD-40 wants to "[milk this] declining segment for as much cash flow as possible." Geographically, international markets such as Asia-Pacific and its EMEA region -- Europe, Middle East, Africa, and India -- experienced the most growth, 4% and 3%, respectively. WD-40 sports a solid balance sheet with cash and long-term debt-to-equity equating to 49% and 75%, respectively, with operating income exceeding interest expense by 78 times. Last year WD-40 paid out 39% of its free cash flow in dividends and currently pays its shareholders $1.36 per share annually, translating to a yield of 1.9%.

Looking ahead
Home Depot and Tractor Supply will report their earnings over the next few weeks. With that said, continued prosperity for Home Depot will depend on the sustainability of the housing recovery and the economy in general. Home Depot raised its guidance for fiscal year 2013 and expects sales to increase 6% with a 7% comparable-store sales increase.  With U.S. Initial Claims for Unemployment Insurance on the decline over the past couple of months, it could very well meet this target.

Similar macroeconomic conditions will also affect Tractor Supply, and as a result it upped its 2013 guidance and expects revenue to come in between $5.12 billion and $5.17 billion, or a 10% to 11% year-over-year increase. WD-40 will continue to benefit from the pragmatic popularity of its namesake lubricant line. Its WD-40 specialty line as well as international expansion should provide the company ample opportunity to offer its shareholders superior long-term capital gains and dividends. Home Depot, Tractor Supply, and WD-40 deserve more of your research time and a place on your Motley Fool Watchlist.

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Fool contributor William Bias has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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