Home Depot (HD +3.63%), the world's largest home-improvement chain, is showing no signs of slowing down. The Atlanta-based retailer recently announced year-over-year revenue and profit growth of 32.7% and 84.6%, respectively, in the first quarter of fiscal 2021.
Expectations were for decelerating growth coming out of the pandemic, as consumers start spending money on things other than home projects. But, so far, they haven't come to fruition. This is clearly great news for shareholders.
The business is still facing two very difficult comparisons in the second and third quarters of 2021 (compared to the same periods last year). So, what do the next 12 months look like for Home Depot?
Image source: Getty Images.
Home Depot continues to build
Home Depot is benefiting right now from an overheated housing market. In the four-week period that ended May 9, median home sales prices soared 22% versus the same time last year. Homes that sold during the period sat on the market for just 18 days, a record low.
Home Depot will stand to gain as consumers are inclined to spend on home improvement projects before selling a house and after buying a new one. And as housing prices keep rising, homeowners feel more comfortable investing to spruce up their properties.
Adding fuel to the fire is the looming threat of potentially higher interest rates, prompting consumers who may have been on the sidelines to now enter the market for a new home. This sort of frenzy shows no signs of letting up over the next year.
Home Depot is definitely operating in a wonderful economic environment for its business. Its two customer segments, do-it-yourself (DIY) and do-it-for-me (DIFM), experienced accelerating growth during the first quarter. In fact, the DIFM group outpaced DIY in Q1, which shouldn't be a surprise given that people are now getting comfortable letting contractors into their homes to work on bigger projects.
Investors don't need to worry about Home Depot's prospects over the next year, even as we start to lap the impressive second and third quarters of 2020 (sales were up more than 23% during that six-month period). The company appears to be stronger than ever, and it will be able to handle whatever comes its way.
However, in 12 months' time, investors will have more clarity around what the post-pandemic world will look like, and I think that's what's more important. Consumers will continue to reassess their living situations, particularly with work-from-home arrangements being more popular. This could provide another tailwind for Home Depot's business.
Home Depot's stock price is attractive
With the company's fundamental outlook out of the way, let's turn our attention to the stock.
Over the past year, Home Depot's stock performance has actually lagged the S&P 500 by a wide margin, despite releasing outstanding results quarter after quarter. And as it stands today, Home Depot's valuation (on a forward price-to-earnings basis) is basically on par with the broader index.
Even for someone who might only loosely follow the company, it's not hard to see that Home Depot is much better than the average business out there. It's the industry leader in a bedrock sector of the U.S. economy, and boasts a return on invested capital (ROIC) of 45.1%, which indicates a deep competitive advantage. Therefore, it should outperform the index and be trading at a premium to it.
While predicting stock price movements over the short term is extremely difficult to do, the booming housing market, Home Depot's competitive strength, and the stock's attractive valuation all give me high confidence that the next 12 months will be very positive for the company.
