Special
Home Depot --
A Treat*

By Bill Barker (TMF Max)

Trading at $71 5/8 as of October 25, 1999

Be it ever so humble, there's no place like home -- and when people have the kind of money that's flashing around the economy these days, a lot of homes are finding that humble doesn't exactly cut it anymore. So homes are being upgraded, homes are being bought, homes are being fixed, homes are being built, and by far the biggest beneficiary of all this has been, and will continue to be, Home Depot (NYSE: HD).

Home Depot is the world's largest home improvement retailer, with over 800 stores in the United States, Canada, Puerto Rico, and Chile. If for some reason you aren't already familiar with the big-box company, start with this -- it has made for one of the best performing stocks over the last decade. Take a look at this graph of the performance of Home Depot burying such companies as Berkshire Hathaway, The Gap, Wal-Mart, and Coke over the last decade. In fact, I'm not sure if there's any major non-tech stock that has outperformed Home Depot over the last 10 years.

The reason for that wonderful stock performance is that the obsession with customer service at Home Depot has translated into stellar and consistent sales and earnings growth. Check out these numbers for the last seven years. (Fiscal year ends in January.)

Year   Sales    Net Income  Return on Equity
     (billions) (millions)      (percent)
1992    5.1        249            14.7
1993    7.1        362            15.8
1994    9.2        457            16.3
1995   12.5        604            17.6
1996   15.5        731            14.7
1997   19.5        937            15.7
1998   24.1       1160            16.3
1999   30.2       1614            18.5
TTM    34.3       1978            19.7
Phenomenal -- and it shows no signs of slowing: Analysts expect long-term annual growth of 23.25%, which actually would be a little bit of a slowdown from what has been achieved of late. Importantly this sales and earnings growth has been funded fairly conservatively. There were 1.27 billion shares outstanding at the end of FY92, and there were 1.48 billion shares outstanding at the beginning of this year; this company isn't casually tossing out options or annually tossing another secondary stock offering at the market.

Debt has also been conservative. Whereas the debt/equity ratio was 0.37 in January of 1993, it was down to 0.18 by January of 1998, and stands at approximately 0.13 today. Plenty of companies can grow sales and earnings for a while, and do so in a way that makes it seem like they are exciting "growth" companies. But when they are really achieving this growth by taking on a lot of debt, or issuing a lot of additional shares, that's the kind of growth that almost always ends up being more of a trick than a treat.

Furthermore, the efficiency of Home Depot is improving, and margins, after many years of remarkable stability, have noticeably ticked up. Between FY1992 and FY1998, Home Depot's gross margins were never lower than 28.5%, nor higher than 29.2%. Over the last 12 months, however, gross margins have moved up to 30.2%. That seemingly little 1% to 1.5%, multiplied by over $30 billion in annual sales, makes for a lot more income dropping down to the bottom line. That is precisely the kind of company that an investor will be most pleased with -- one improving on the top, middle, and bottom lines of both the income statement and the balance sheet.

And the future's so bright, you've got to build some shade. With longtime competitor Hechinger's closing 117 stores, Home Depot stands to be seeing more business than ever, and that's saying something -- same-store sales were up 11% in the last quarter. The company has yet to take on most of the world, so there's tremendous room for global expansion. Also, Home Depot is soon to get seriously onto the Web. The company plans to offer any product through its website for either in-store pick up, same-day or next-day delivery, or home delivery. This is a major undertaking, set to be fully integrated with its stores by early 2000. While the early going could be bumpy, if pulled off this will be a major, major victory for a company already as used to winning as the 1950s Yankees.

As you'll notice with this feature, we look back on these pieces 12 months hence to examine just how these Tricks and Treats have performed as stocks. On that basis, I must admit, I'd be slightly more cautious about whether a goblin or magic fairy princess is ringing the doorbell today.

As I write this, the stock trades at about 55 times trailing earnings. Let's face it, that doesn't make it a front-runner in the Cheapest Stock in the Market competition. In fact, the last time that Home Depot traded at such a pricey multiple to earnings was roughly December of 1992, when the stock first hit a split-adjusted price of $17 a share. It wasn't until March of 1997 that the stock really stayed above that level. That's over four years that some purchasers may have been waiting to see a profit on their shares, even though, as the chart above shows, Home Depot was firing on all cylinders throughout that time.

So for those that bought in 1992 and held and held and held, the payoffs were certainly not in the near-term, and that possibility exists again today. This isn't a stock that I'd want to bet the house on over the next 12 months. Then again, there really isn't any stock that a Fool would be "betting" on over a scant 12 months in the first place.

For those who are prepared to make a longer-term commitment, and who are prepared to undertake their own research to determine whether this is an investment that truly meets with their own investing goals, it just may be the case that there's no place like Home.

Next Treat -- Berkshire Hathaway

Home Depot Company Information:
Trades on NYSE under symbol HD

  • Home Depot's website: www.homedepot.com
  • Current Quote
  • Home Depot's Chart
    Other Related Links:
  • Home Depot Message Board
  • Home Depot: Value Creation Despot -- Fool on the Hill -- 8/12/99

    * A Trick or Treat represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts.

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